Understanding Investor Sentiment: The Case of Soccer


  • We are grateful to an anonymous referee, Rui Albuquerque, Sandro Andrade, Alex Edmans, Andrew Ellul, Diego Garcia, Michael Halling, Milton Harris, Tullio Jappelli, Christian Julliard, Ambrus Kecskés, Marco Pagano, Marcel Rindisbacher, Masahiro Watanabe, Yuhang Xing, and seminar participants at the University of Naples, the 2008 Utah Winter Finance Conference, the 2009 Amsterdam Asset Pricing Retreat, the 2009 European Financial Management Association Meetings, the 2009 Financial Management Association European Conference, and the 2010 Eastern Finance Association Meetings for helpful suggestions, and to Tom Johnson from Betfair and Carl Wolfenden from Tradesports for data on prices of soccer contracts traded on these betting exchanges.


We examine the extent to which the stock market's inefficient responses to resolutions of uncertainty depend on investors’ biased ex ante beliefs regarding the probability distribution of future event outcomes or their ex post irrational reactions to these outcomes. We use a sample of publicly traded European soccer clubs and analyze their returns around important matches. Using a novel proxy for investors’ expectations based on contracts traded on betting exchanges (prediction markets), we find that within our sample, investor sentiment is attributable, in part, to a systematic bias in investors’ ex ante expectations. Investors are overly optimistic about their teams’ prospects ex ante and, on average, end up disappointed ex post, leading to negative postgame abnormal returns. Our evidence may have important implications for firms’ investment decisions and corporate control transactions.