Investor Sentiment in the Stock Market

Malcolm  Baker; Jeffrey  Wurgler

Abstract

We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

Citation:

Baker, Malcolm, and Jeffrey Wurgler. "Investor Sentiment in the Stock Market." Journal of Economic Perspectives 21, no. 2 (Spring 2007): 129–151.

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Supplement | HBS Case Collection | April 2018

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Malcolm Baker and Emily R. McComb

In February 2011, Adam Koppel, a Managing Director at Brookside Capital, the public equity arm of Bain Capital, must decide whether to increase or exit the firm’s position in Celgene Corporation. News has emerged that raises potential safety concerns associated with Celgene’s key drug, Revlimid. In response, Celgene’s share price has traded down 20% in the last two months, and is now almost 10% below the level where Brookside made their initial investment.

Keywords: life sciences; biotechnology; public market investing; Celgene; Revlimid; hedge fund; valuation; growth stocks; Valuation; Investment; Decision Choices and Conditions; Analysis;

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Baker, Malcolm, and Emily R. McComb. "Celgene." Harvard Business School Spreadsheet Supplement 218-743, April 2018. View Details

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Case | HBS Case Collection | March 2018

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Malcolm Baker and Emily McComb

In February 2011, Adam Koppel, a Managing Director at Brookside Capital, the public equity arm of Bain Capital, must decide whether to increase or exit the firm’s position in Celgene Corporation. News has emerged that raises potential safety concerns associated with Celgene’s key drug, Revlimid. In response, Celgene’s share price has traded down 20% in the last two months, and is now almost 10% below the level where Brookside made their initial investment.

Keywords: life sciences; biotechnology; public market investing; Celgene; Revlimid; hedge fund; valuation; growth stocks; Valuation; Investment; Decision Choices and Conditions; Analysis; Biotechnology Industry;

Citation:
Baker, Malcolm, and Emily McComb. "Celgene." Harvard Business School Case 218-094, March 2018. View Details

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Supplement | HBS Case Collection | March 2018

Celgene (B)

Malcolm Baker and Emily McComb

In February 2011, Adam Koppel, a Managing Director at Brookside Capital, the public equity arm of Bain Capital, must decide whether to increase or exit the firm’s position in Celgene Corporation. News has emerged that raises potential safety concerns associated with Celgene’s key drug, Revlimid. In response, Celgene’s share price has traded down 20% in the last two months, and is now almost 10% below the level where Brookside made their initial investment.

Keywords: life sciences; biotechnology; public market investing; Celgene; Revlimid; hedge fund; valuation; growth stocks; Valuation; Investment; Decision Choices and Conditions; Analysis; Biotechnology Industry;

Citation:
Baker, Malcolm, and Emily McComb. "Celgene (B)." Harvard Business School Supplement 218-099, March 2018. View Details

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Investor Sentiment in the Stock Market

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