Investor sentiment and firm characteristics

Baker and Wurgler (2006) have shown that securities that are difficult to value and have high arbitrage costs are more affected by investor sentiment. Indeed, we study the hypothesis that the securities of young, small, less profitable, less tangible, low dividend and high sales growth firms are the most vulnerable to investor sentiment. Using a VAR model, we find that in the Tunisian market, high sentiment leads to low future returns for the securities of large firms, the youngest, the least profitable, the least tangible, paying lower dividends and with lower sales growth. Furthermore, past returns with inverse characteristics can predict investor sentiment. Our findings also have practical investment and policy implications for investors and corporate decision makers, but also for policy makers in their assessment of financial fundamentals, hence for efficient market theory.