Does Cross-Sectional Return Extrapolation Explain Anomalies?

Abstract

Using messages from Twitter and StockTwits, we provide cross-sectional evidence that stocks are exposed to return extrapolation. When a stock experiences high returns, sentiment towards that stock increases substantially. Consistent with findings that investors perceive capital gains differently than dividends, the sentiment of non-dividend-paying stocks responds to past returns up to 5 times more strongly than dividend-paying stocks. Using dividend-paying status to proxy for return extrapolation exposure (RXE), we find that momentum and long-term reversal returns are stronger for non-dividend-paying stocks, suggesting that RXE contributes to these anomalies. However, we find little evidence that RXE explains the value premium.

Keywords: Return Extrapolation, Dividends, Beliefs, Anomalies

JEL Classification: G11, G12, G41