Article | Journal of Investment Management | Second Quarter 2008

How Does Investor Sentiment Affect the Cross-Section of Returns

by Malcolm Baker, Johnathan Wang and Jeffrey Wurgler


Broad waves of investor sentiment should have larger impacts on securities that are more difficult to value and to arbitrage. Consistent with this intuition, we find that when an index of investor sentiment takes low values, small, young, high volatility, unprofitable, non-dividend-paying, extreme growth, and distressed stocks earn relatively higher subsequent returns. When sentiment is high, the aforementioned categories of stocks earn relatively lower subsequent returns.

Keywords: Volatility; Behavioral Finance; Stocks; Investment; Investment Return; Attitudes;


Baker, Malcolm, Johnathan Wang, and Jeffrey Wurgler. "How Does Investor Sentiment Affect the Cross-Section of Returns." Journal of Investment Management 6, no. 2 (Second Quarter 2008): 57–72.