Institutional Investor Sentiment and Aggregate Stock Returns

Abstract

This paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed, and that their sentiment helps tilting stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this research we add to the large amount of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioral phenomenon, on market efficiency and price discovery.

Keywords: sentiment, retail traders, institutional investors, cash flows, expectations

JEL Classification: G4, G40, G41, G14