Investor Sentiment and the Cross-Section of Stock Returns
Malcolm P. Baker
Harvard Business School; National Bureau of Economic Research (NBER)
NYU Stern School of Business; National Bureau of Economic Research (NBER)
We study how investor sentiment affects the cross-section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning-of-period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these stocks tend to earn relatively low subsequent returns.
Number of Pages in PDF File: 52
Keywords: sentiment, cross-section, arbitrage, asset pricing
JEL Classification: G12, G14
Date posted: November 18, 2003 ; Last revised: January 13, 2009
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