Investor sentiment and asset prices: Evidence from the ex-day

Abstract

We use the ex-dividend day setting to examine the association between investor sentiment and asset prices. While the dividend on the ex-day conveys no new information, we find that ex-day prices behave differently during high- versus low-sentiment periods. We show that high investor sentiment is associated with a reduction in the ex-day price-drop of about eight percent of the dividend amount. The magnitude of this association is comparable to those of traditional ex-day explanations. In addition, for stocks that are more sensitive to investor sentiment the effect is significantly larger than traditional ex-day explanations. Overall, our results contribute to the measurement of investor sentiment's relative importance to asset prices and narrow the gap between the theoretically predicted versus the empirically observed ex-day stock price.