The Real Effects of Sentiment and Uncertainty

Fisher College of Business Working Paper No. 2023-03-011

Charles A. Dice Working Paper No. 2023-11

51 Pages Posted: 17 May 2023 Last revised: 14 Jun 2023

See all articles by Justin Birru

Justin Birru

Ohio State University (OSU) - Department of Finance

Trevor Young

Tulane University - A.B. Freeman School of Business

Date Written: June 13, 2023

Abstract

The effects of sentiment should be strongest during times of heightened valuation uncertainty. As such, we document a significant amplifying role for market uncertainty in the relation between sentiment and aggregate investment. A one-standard-deviation increase in uncertainty more than doubles the effect of sentiment on investment. Moreover, allowing uncertainty-dependent sentiment effects substantially increases explanatory power (i.e., R2). Our results are robust to many sentiment, uncertainty, and investment measures. We also document similar effects for aggregate equity issuance. Consistent with theory, we find even stronger results in the cross-section of valuation uncertainty. The evidence suggests that the importance of sentiment for corporate decisions varies over time and depends crucially on the underlying level of market uncertainty.

Keywords: sentiment, uncertainty, corporate investment, equity issuance, mispricing, behavioral finance

JEL Classification: D81, D84, G31, G35, G40, G41, E22

Suggested Citation

Birru, Justin and Young, Trevor, The Real Effects of Sentiment and Uncertainty (June 13, 2023). Fisher College of Business Working Paper No. 2023-03-011, Charles A. Dice Working Paper No. 2023-11, Available at SSRN: https://ssrn.com/abstract=4451536 or http://dx.doi.org/10.2139/ssrn.4451536

Justin Birru (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Trevor Young

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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