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Investor Sentiment and the Cross-Section of Stock Returns

Malcolm Baker and Jeffrey Wurgler ()

No 10449, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2004-04
New Economics Papers: this item is included in nep-fmk
Note: CF AP
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Published as Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, 08.

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