Firm-Level Versus Aggregate Market Investor Sentiment: What Matters Most for Corporate Announcement Returns

45 Pages Posted: 7 Jun 2019 Last revised: 2 Jan 2020

See all articles by Nader Mahmoudi

Nader Mahmoudi

University of Newcastle (Australia) - Newcastle Business School

Paul Docherty

The Brattle Group

Adrian Melia

University of Newcastle (Australia)

Date Written: January 2, 2020

Abstract

Noise trader models of market behaviour propose that investor sentiment affects market responses to corporate announcements. As beliefs can be cross-sectionally heterogeneous, firm-specific investor sentiment may differ from aggregate levels of investor sentiment. Previous studies, which focus exclusively on market-level investor sentiment measures, are likely to have under-stated the economic magnitude of the role that sentiment plays in corporate announcement returns. We provide the first theoretical model for the relative importance of firm- and market-level investor sentiment for corporate announcement returns. We also demonstrate empirically that firm-level investor sentiment has marginal explanatory power beyond market-level investor sentiment for merger and acquisition announcement returns, turnover and long-run reversals. It is also shown that firm-level investor sentiment dominates when there is high divergence in investor sentiment across firms, whereas the effect of market-level investor sentiment increases during hot market periods.

Keywords: Firm-Level Investor Sentiment; Market-Level Investor Sentiment, Stocktwits, Mergers and Acquisitions, Return Reversals, Heterogeneity, Uncertainty

JEL Classification: G01; G03

Suggested Citation

Mahmoudi, Nader and Docherty, Paul and Melia, Adrian, Firm-Level Versus Aggregate Market Investor Sentiment: What Matters Most for Corporate Announcement Returns (January 2, 2020). Available at SSRN: https://ssrn.com/abstract=3391698 or http://dx.doi.org/10.2139/ssrn.3391698

Nader Mahmoudi (Contact Author)

University of Newcastle (Australia) - Newcastle Business School ( email )

Hunter St &, Auckland St
Newcastle, NSW 2300
Australia

Paul Docherty

The Brattle Group ( email )

44 Brattle Street
3rd Floor
Cambridge, MA 02138-3736
United States

Adrian Melia

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

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