Firm-level investor sentiment and corporate announcement returns

Abstract

Behavioural models of investor behaviour propose that sentiment affects investors’ responses to corporate announcements. As beliefs can be cross-sectionally heterogeneous, firm-specific investor sentiment may differ from aggregate levels of investor sentiment. We provide empirical evidence about the explanatory power of both firm- and market-level investor sentiment for corporate announcement returns. We demonstrate empirically that firm-level investor sentiment has marginal explanatory power beyond market-level investor sentiment for corporate announcement returns, turnover and long-run reversals. Previous studies, which focus on market-level investor sentiment measures are likely to have under-stated the economic magnitude of the role that sentiment plays in corporate announcement returns.