Institutional Investors and Market Sentiment: A Revisit

Abstract

DeVault, Sias, and Starks (2019) find a positive correlation between institutional investors’ net buying of risky stocks and the contemporaneous change in market sentiment. They interpret this as evidence that institutional investors function as sentiment traders whose demand shocks drive prices away from value. However, this correlation may reflect a recovery from mispricing. We use the sentiment level as a measure of mispricing and find that following high sentiment, institutional investors tend to sell (or buy less) risky stocks, and that their trades relate to sentiment corrections. Our findings are consistent with the notion that institutional investors bet against sentiment.

Keywords: Market sentiment, Institutional investors

JEL Classification: G12, G14, G15