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Overnight Returns and Firm-Specific Investor Sentiment

Published online by Cambridge University Press:  01 March 2018

David Aboody ,
Omri Even-Tov ,
Reuven Lehavy  and
Brett Trueman
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Abstract

We examine the suitability of using overnight returns to measure firm-specific investor sentiment by analyzing whether they possess characteristics expected of a sentiment measure. We document short-term overnight-return persistence, consistent with existing evidence of short-term persistence in the share demand of sentiment-influenced investors. We find that short-term persistence is stronger for harder-to-value firms, consistent with existing evidence that sentiment plays a larger role for such firms. We show that stocks with high (low) overnight returns underperform (outperform) over the longer term, consistent with prior evidence of temporary sentiment-driven mispricing. Overall, our evidence supports using overnight returns to measure firm-specific sentiment.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 485 - 505
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank an anonymous referee, Brad Barber, Hendrik Bessembinder (the editor), Eddie Riedl, Siew Hong Teoh, and seminar participants at Boston University; the University of California, Berkeley; Notre Dame; and the joint UCLA/University of California, Irvine/USC accounting conference for their helpful comments. All remaining errors are our own.

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