Investor Sentiment and the Cross-Section of Stock Returns




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    • Baker is at the Harvard Business School and National Bureau of Economic Research; Wurgler is at the NYU Stern School of Business and the National Bureau of Economic Research. We thank an anonymous referee, Rob Stambaugh (the editor), Ned Elton, Wayne Ferson, Xavier Gabaix, Marty Gruber, Lisa Kramer, Owen Lamont, Martin Lettau, Anthony Lynch, Jay Shanken, Meir Statman, Sheridan Titman, and Jeremy Stein for helpful comments, as well as participants of conferences or seminars at Baruch College, Boston College, the Chicago Quantitative Alliance, Emory University, the Federal Reserve Bank of New York, Harvard University, Indiana University, Michigan State University, NBER, the Norwegian School of Economics and Business, Norwegian School of Management, New York University, Stockholm School of Economics, Tulane University, the University of Amsterdam, the University of British Columbia, the University of Illinois, the University of Kentucky, the University of Michigan, the University of Notre Dame, the University of Texas, and the University of Wisconsin. We gratefully acknowledge financial support from the Q Group and the Division of Research of the Harvard Business School.


We study how investor sentiment affects the cross-section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning-of-period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these categories of stock earn relatively low subsequent returns.