Investor sentiment, asset returns and firm characteristics: Evidence from the Korean Stock Market

This study investigates the effects of investor sentiment on asset returns with respect to firm characteristics. By analysing a unique stock trading dataset of the Korean Stock Market that contains rich information on investor types and sentiment, we confirm that high investor sentiment induces higher stock market returns. The positive association between investor sentiment and stock returns is highly significant after controlling for trading behaviours, other risk factors and firm characteristics. Interestingly, investor sentiment has stronger effects on small firm, low-priced, high book-to-market ratio, high excess return, and highly volatile stocks, and stocks heavily traded by individual investors. The diverse degree and intensity of the sentiment effect across stocks with different firm characteristics is possibly attributable to individual investor’s trading.