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

45 Pages Posted: 7 Jun 2019

See all articles by Nader Mahmoudi

Nader Mahmoudi

University of Newcastle (Australia)

Paul Docherty

Monash University

Adrian Melia

University of Newcastle (Australia)

Date Written: May 21, 2019

Abstract

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

Mahmoudi, Nader and Docherty, Paul and Melia, Adrian, Firm-Level Versus Aggregate Market Investor Sentiment: What Matters Most for Corporate Announcement Returns (May 21, 2019). 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) ( email )

Hunter St & Auckland St
Newcastle, 2300
Australia

Paul Docherty

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Adrian Melia

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

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