Investor Sentiment and Return Comovements: Evidence from Stock Splits and Headquarters Changes

Review of Finance, Forthcoming

47 Pages Posted: 12 Dec 2010 Last revised: 20 Apr 2012

Alok Kumar

University of Miami - School of Business Administration

Jeremy K. Page

Brigham Young University

Oliver G. Spalt

Tilburg University - Department of Finance

Date Written: January 14, 2012

Abstract

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.

Suggested Citation

Kumar, Alok and Page, Jeremy K. and Spalt, Oliver G., Investor Sentiment and Return Comovements: Evidence from Stock Splits and Headquarters Changes (January 14, 2012). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1724022 or http://dx.doi.org/10.2139/ssrn.1724022

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Jeremy K. Page

Brigham Young University ( email )

Marriott School of Management
685 TNRB
Provo, UT 84602
United States
801-422-7173 (Phone)

HOME PAGE: http://marriottschool.byu.edu/directory/details?id=19364

Oliver G. Spalt

Tilburg University - Department of Finance ( email )

Department of Finance
Tilburg University
Tilburg, 5000 LE
Netherlands
+31 13 466 3545 (Phone)

HOME PAGE: http://www.oliverspalt.com

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