65 Pages Posted: 5 Dec 2005
Date Written: November 2006
This paper develops a novel stock-by-stock measure of investor sentiment which I call sentiment beta. It is defined as a sensitivity of stock returns to sentiment changes. Using this measure I test two hypotheses. First hypothesis postulates that sentiment affects stocks of some firms more than others due to differences in firm characteristics. Second hypothesis posits that more sentiment-sensitive stocks have higher individual ownership. Consistent with the first hypothesis, I find that more sentiment sensitive stocks are smaller, younger, with greater short-sales constraints, higher idiosyncratic volatility and lower dividend yields. However, given size and volatility, high sentiment beta stocks have more of an analyst following, greater institutional ownership, a higher likelihood of S&P500 membership, higher turnover and lower book-to-market ratios. Stocks with high exposure to sentiment deliver lower future returns inconsistent with the idea that noise trader risk is priced. Institutional analysis reveals that institutions stayed away from sentiment-sensitive stocks in the 1980's and held more of these stocks since the early 1990's. This suggests that institutions may well have been exacerbating sentiment-driven mispricing instead of countering the actions of sentiment traders.
Keywords: Investor Sentiment, Firm Characteristics, Institutional investors
JEL Classification: G1
Suggested Citation: Suggested Citation