Firm-Level Versus Aggregate Market Investor Sentiment: What Matters Most for Corporate Announcement Returns
45 Pages Posted: 7 Jun 2019
Date Written: May 21, 2019
Noise trader models of market behaviour propose that investor sentiment affects investor responses to corporate announcements. Existing empirical studies test these theoretical models using market-level measures of investor sentiment. However, the lack of cross-sectional heterogeneity may limit the explanatory power of market-level measures of investor sentiment when analysing firm-specific issues. We apply a new measure of firm-level investor sentiment using data from the StockTwits social media platform to examine the relative explanatory power of measures of firm- and market-level investor sentiment as determinants of merger and acquisition announcement returns. We report evidence that firm-level investor sentiment dominates market-level investor sentiment in explaining announcement returns, particularly in stocks that are subject to more costly arbitrage and are difficult to value.
Keywords: Firm-Level Investor Sentiment; Market-Level Investor Sentiment, Stocktwits, Mergers and Acquisitions, Return Reversals, Limits to Arbitrage
JEL Classification: G01; G03
Suggested Citation: Suggested Citation