What Determines Manager and Investor Sentiment?

Abstract

I find that Managerial and Investor Sentiment are determined by differing sets of economic variables, that share some common factors: Inflation, Liquidity and the Term Premium. Decomposing the Sentiment Indices, I find that the Investor Sentiment Model Component and the Managerial Sentiment Residual Component are primarily responsible for the predictive power of predicting cross-sectional stock returns that is much stronger than previous results. I present evidence that part of the predictive power is due to the components predicting priced market factors.