I analyze whether or not market-wide investor sentiment induces stock mispricing, by affecting the boldness of predictions of firms' long-term earnings growth. I predict that bullish market-wide sentiment induces investors to aggressively separate firms with high growth futures from others, and that this excessive boldness results in a high level of mispricing. Consistent with my prediction, I observe an excessively large dispersion in consensus growth forecasts when proxies for investor sentiment are high at the beginning of the period. Furthermore, stocks with higher-predicted growth experience more negative forecast revisions and lower subsequent stock returns, especially following periods of high investor sentiment.
All Science Journal Classification (ASJC) codes
- Business, Management and Accounting (miscellaneous)