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Investor sentiment and stock returns: Wenchuan Earthquake

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Listed:
  • Shan, Liwei
  • Gong, Stephen X.

Abstract

This paper exploits a natural experiment (the Wenchuan Earthquake in China) to study the effects of investor sentiment on stock returns. We find that during the 12months following the earthquake, stock returns are significantly lower for firms headquartered nearer the epicenter than for firms further away. Further analyses indicate that this pattern of stock returns does not exist before or long after the earthquake, and cannot be explained by actual economic losses or a change in systematic risk. Overall, our evidence is consistent with the interaction of local bias and investor sentiment affecting stock returns.

Suggested Citation

  • Shan, Liwei & Gong, Stephen X., 2012. "Investor sentiment and stock returns: Wenchuan Earthquake," Finance Research Letters, Elsevier, vol. 9(1), pages 36-47.
    • Handle: RePEc:eee:finlet:v:9:y:2012:i:1:p:36-47
    DOI: 10.1016/j.frl.2011.07.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock Returns; Earthquake; Behavioral finance; Sentiment; Local bias; Disasters;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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