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Sentiment stocks

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  • Dong, Hang
  • Gil-Bazo, Javier

Abstract

To study how investor sentiment at the firm level affects stock returns, we match more than 58 million social media messages in China with listed firms and construct a measure of individual stock sentiment based on the tone of those messages. We document that positive investor sentiment predicts higher stock risk-adjusted returns in the very short term followed by price reversals. This association between stock sentiment and stock returns is not explained by observable stock characteristics, unobservable time-invariant characteristics, market-wide sentiment, overreaction to news, or changing investor attention. Consistent with theories of investor sentiment, we find that the link between sentiment and stock returns is mainly driven by positive sentiment and non-professional investors. Finally, exploiting a unique feature of the Chinese stock market, we are able to isolate the causal effect of sentiment on stock returns from confounding factors.

Suggested Citation

  • Dong, Hang & Gil-Bazo, Javier, 2020. "Sentiment stocks," International Review of Financial Analysis, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302179
    DOI: 10.1016/j.irfa.2020.101573
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    More about this item

    Keywords

    Investor sentiment; Stock returns; Social media; Investor attention; News sentiment;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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