Firm-level Investor Sentiment and Stock Returns *

Abstract

We introduce a novel market-based measure of firm-level investor sentiment, capturing both the exaggeration of investors’ beliefs and shifts in their attention. Our validation demonstrates that this measure exhibits attractive features that coincide well with characteristics of investor sentiment. In the cross section, stocks characterized by high specific investor sentiment significantly underperform those with low specific investor sentiment in the subsequent month. This negative sentiment-return relationship remains robust even after accounting for market-level sentiment influences. Further evidence shows that stocks with high investor sentiment tend to attract more speculative demand, leading to overpricing and subsequent low returns.

Keywords: Firm-Level Sentiment, Speculative demand, Noise Trader

JEL Classification: C21, G11, G12, G14