This paper examines how investor sentiment influences which stocks outperform or underperform, particularly when valuations are subjective and arbitrage is difficult. The authors find sentiment matters most for smaller, younger, volatile, unprofitable, and distressed companies, with subsequent return patterns reversing as sentiment shifts.
Investor Sentiment and the Cross-Section of Stock Returns
Jeffrey Wurgler, Malcolm Baker
Research
52 Pages
Key Takeaways
Sentiment Reverses Returns: Across 7 speculative stock characteristics, low sentiment precedes relatively stronger returns, while high sentiment tends to precede weaker subsequent performance.
Hard To Value: The analysis focuses on 10 stock portfolios, showing sentiment has greater influence where valuation uncertainty and limits to arbitrage are highest.
Long Historical Sample: The authors construct their sentiment framework using market data spanning roughly 40 years, allowing comparisons across multiple sentiment cycles and market environments.
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