NBS Seminar Series - Firm-level versus aggregate market investor sentiment
NBS Seminar
What matters most for corporate announcement returns
Noise trader models of market behaviour propose that investor sentiment affects market responses to corporate announcements. As beliefs can be cross-sectionally heterogeneous, firm-specific investor sentiment may differ from aggregate levels of investor sentiment.
Previous studies, which focus exclusively 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. We provide the first theoretical model for the relative importance of firm - and market-level investor sentiment for corporate announcement returns.
We also demonstrate empirically that firm-level investor sentiment has marginal explanatory power beyond market-level investor sentiment for merger and acquisition announcement returns, turnover and long-run reversals. It is also shown that firm-level investor sentiment dominates when there is high divergence in investor sentiment across firms, whereas the effect of market-level investor sentiment increases during hot market periods.
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