The Influence of Emotions on Cross-Section Returns: Tests for Cognitive Appraisal Theory

Abstract

This study provides empirical evidence supporting Hirshleifer’s (2001) psychology-based asset-pricing theory proposition that investors’ emotions affect contemporary stock returns. The analysis employs a cross-sectional approach to investigate the impact of emotions expressed in news and social media, such as optimism, joy, anger, gloom, fear, and stress, on stock returns. The results indicate that company-specific media-based emotions significantly influence current stock returns and remain consistent across different sample periods, economic cycles, and market sentiment states. Additionally, the findings suggest that the effect of investor emotions is more pronounced when the frequency of media mentions is high. The research also highlights that investor emotions cannot be substituted by a single-dimension sentiment, as the appraisal effect of emotions is independent of the sentiment effect.