Abstract

http://ssrn.com/abstract=1848207
 
 

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Do Institutional Investors and Security Analysts Mitigate the Effects of Investor Sentiment?


Bradford Cornell


California Institute of Technology

Wayne R. Landsman


University of North Carolina Kenan-Flagler Business School

Stephen Stubben


University of Utah

May 20, 2011


Abstract:     
One of most significant empirical findings in the behavioral finance literature is that investor sentiment affects asset prices. However, the mechanism by which sentiment affects asset prices is not well understood. Individuals are widely believed to be more influenced by sentiment than other investors, and individual noise traders combined with limits to arbitrage could explain sentiment-driven mispricing in stocks. Another explanation for sentiment-driven mispricing is that sentiment affects all market participants. To explore these two possibilities, we investigate decisions made by institutional investors and security analysts. We find that institutional investors tend to increase holdings in, and analysts tend to issue buy recommendations for, firms with subjective values when sentiment is high, even though these firms exhibit lower subsequent stock returns. Furthermore, returns tests show that these decisions by institutional investors and analysts are associated with greater sentiment-related mispricing of stocks. Thus, although we find that sentiment-related mispricing is mitigated when institutional investors and analysts act against it, more often than not they fail to do so.

Number of Pages in PDF File: 33

Keywords: Investor Sentiment, Institutional Investors, Security Analysts

JEL Classification: G12

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Date posted: May 25, 2011  

Suggested Citation

Cornell, Bradford and Landsman, Wayne R. and Stubben, Stephen, Do Institutional Investors and Security Analysts Mitigate the Effects of Investor Sentiment? (May 20, 2011). Available at SSRN: http://ssrn.com/abstract=1848207 or http://dx.doi.org/10.2139/ssrn.1848207

Contact Information

Bradford Cornell (Contact Author)
California Institute of Technology ( email )
Pasadena, CA 91125
United States
310-825-2922 (Phone)
310-206-5455 (Fax)
Wayne R. Landsman
University of North Carolina Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Stephen Stubben
University of Utah ( email )
1655 E. Campus Center
Salt Lake City, UT 84112
United States
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