Title

Investor sentiment and aggregate stock returns: the role of investor attention

Abstract

We build on the intuitive, albeit overlooked, relationship between investor attention and investor sentiment to explore the open question of the impact of investor sentiment on aggregate stock returns. We find that investor attention causes changes in sentiment but not vice versa. Moreover, the effect of attention on sentiment is short-lived for medium and large stocks although persists for small stocks. We also document the existence of an important mediating role of attention in the link between sentiment and aggregate stock returns. Investor attention alters the predictability value of sentiment in future aggregate returns, providing new insight into the information content of investor sentiment as it relates to investor attention. We find that sentiment caused by investors’ inattentiveness mainly drives the underlying potent relationship between investor sentiment and aggregate stock returns. Our results accord with the notion that investor attention generally improves market efficiency.

Department(s)

Finance and General Business

Document Type

Article

DOI

https://doi.org/10.1007/s11156-018-0753-2

Keywords

Aggregate stock returns, Investor attention, Investor sentiment

Publication Date

8-15-2019

Journal Title

Review of Quantitative Finance and Accounting

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