Understanding Investor Sentiment: The Case of Soccer

Abstract

We examine whether investors' biased ex-ante beliefs regarding the probability distribution of future events' outcomes can partially explain the stock market's inefficient response to resolution of uncertainty. In our experiment, we analyze stock returns of publicly traded European soccer clubs around important matches. Using a novel proxy for investors' expectations derived from contracts traded on betting exchanges (prediction markets), we find that in our sample investor sentiment is attributable in part to a systematic bias in investors' ex-ante expectations. Investors are overly optimistic about their teams' prospects ex-ante and, on average, end up disappointed ex-post, leading to negative post-event abnormal returns. Our evidence may have important implications for firms' investment decisions and corporate control transactions.

Keywords: investor sentiment, expectations, prediction markets

JEL Classification: C93