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

33 Pages Posted: 25 May 2011

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Stephen Stubben

University of Utah

Date Written: 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.

Keywords: Investor Sentiment, Institutional Investors, Security Analysts

JEL Classification: G12

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: https://ssrn.com/abstract=1848207 or http://dx.doi.org/10.2139/ssrn.1848207

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

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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