The Real Effects of Sentiment and Uncertainty

Justin Birru and Trevor Young
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Justin Birru: Ohio State U
Trevor Young: Tulane U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: The effects of sentiment should be strongest during times of heightened valuation uncertainty. As such, we document a significant amplifying role for market uncertainty in the relation between sentiment and aggregate investment. A one-standard-deviation increase in uncertainty more than doubles the effect of sentiment on investment. Moreover, allowing uncertainty-dependent sentiment effects substantially increases explanatory power (i.e., R2). Our results are robust to many sentiment, uncertainty, and investment measures. We also document similar effects for aggregate equity issuance. Consistent with theory, we find even stronger results in the cross-section of valuation uncertainty. The evidence suggests that the importance of sentiment for corporate decisions varies over time and depends crucially on the underlying level of market uncertainty.

JEL-codes: D81 D84 E22 G31 G35 G40 G41 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-cfn and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2023-11

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