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Investor sentiment, credit rating, and stock returns

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  • Lee, Jong Hwa
  • Sung, Taeyoon
  • Seo, Sung Won

Abstract

We confront the distress risk puzzle. Conventionally, stocks with high distress risk should yield higher returns. However, this notion is found to be empirically inaccurate. We develop a stock-level investor sentiment measure and find that behaviors of individual investors affect the future excess returns of stocks despite the presence of distress risk. Our findings suggest that net buying by individual investors enhances our understanding of the negative relationship between credit ratings and future stock returns. To do so, we develop a cross-sectional measure of the investor sentiment for each individual stock at each month.

Suggested Citation

  • Lee, Jong Hwa & Sung, Taeyoon & Seo, Sung Won, 2022. "Investor sentiment, credit rating, and stock returns," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1076-1092.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:1076-1092
    DOI: 10.1016/j.iref.2022.04.002
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    References listed on IDEAS

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    Cited by:

    1. Nguyen, Thu Ha & Lan, Yihui & Treepongkaruna, Sirimon & Zhong, Rui, 2023. "Credit rating downgrades and stock price crash risk: International evidence," Finance Research Letters, Elsevier, vol. 55(PB).

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    More about this item

    Keywords

    Investor sentiment; Credit rating; Buy–sell imbalance; Individual stock returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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