The role of stock price synchronicity on the return-sentiment relation

Abstract

Traditional finance leaves no roles for investor sentiment on account of the efficient information and arbitrage. This paper investigates how information adjusts the individual stock investor sentiment effects on stock prices. We find that the return-sentiment relations on stocks with low stock price synchronicity outperform those with high stock price synchronicity. Moreover, the return-sentiment relations remain positive and significant among stock portfolios doubled-sorted by stock price synchronicity and limit-of-arbitrage variables, which implies that limits of arbitrage worsen information environment and weaken the roles of stock price synchronicity on the return-sentiment relation. Finally, this paper decomposes the individual stock investor sentiment and confirms the roles of the components of individual stock investor sentiment on stock prices. Overall, this paper confirms the roles of individual stock investor sentiment on stock prices.