Investor Sentiment and Stock Market Response to Corporate News
38 Pages Posted: 25 Mar 2008 Last revised: 8 Jul 2008
Date Written: June 2008
We examine whether market-wide investor sentiment influences the stock price response to firm-specific news. We use the recently developed measure of investor sentiment by Baker and Wurgler (2006, 2007) and focus on the stock price response to earnings announcements. Our results indicate that the prevailing sentiment sways stock price response to news in the direction of the sentiment - the positive stock price response to good news increases with sentiment, whereas the negative stock price response to bad news decreases with sentiment. The influence of sentiment on the stock price response is especially pronounced for small stocks, young stocks, volatile stocks, non-dividend paying stocks and distressed stocks. We find that sentiment also impacts the stock price response to dividend changes and stock split announcements.
Keywords: Investor Sentiment, Corporate News, Event Studies, Behavioral Finance
JEL Classification: D14, D21, G24
Suggested Citation: Suggested Citation