Investor Sentiment and Return Comovements: Evidence from Stock Splits and Headquarters Changes
University of Miami - School of Business Administration
Jeremy K. Page
Brigham Young University
Oliver G. Spalt
Tilburg University - Department of Finance
January 14, 2012
Review of Finance, Forthcoming
This paper examines whether the trading activities of retail and institutional investors cause comovements in stock returns. Using stock splits and headquarters changes events and a variety of trading-based measures, we show directly that retail investors generate excess comovements in stock returns. Specifically, around stock splits, retail trading correlations decrease with stocks in the pre-split price range and increase with the post-split price range. Further, shifts in retail trading correlation influence return comovement changes around stock splits. In the cross-section, excess return comovements among low-priced stocks are amplified when retail trades are more correlated. We find similar patterns among local stocks and when firms change their corporate headquarters. These comovement patterns are stronger when uncertainty is high and behavioral biases are amplified. In contrast to retail trading, institutional trading attenuates return comovements.
Number of Pages in PDF File: 47
Date posted: December 12, 2010 ; Last revised: April 20, 2012
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