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Investor Sentiment and the Cross‐Section of Stock Returns

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  • MALCOLM BAKER
  • JEFFREY WURGLER

Abstract

We study how investor sentiment affects the cross‐section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning‐of‐period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non‐dividend‐paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these categories of stock earn relatively low subsequent returns.

Suggested Citation

  • Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    • Handle: RePEc:bla:jfinan:v:61:y:2006:i:4:p:1645-1680
    DOI: 10.1111/j.1540-6261.2006.00885.x
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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