This study analyzes the impact of investor sentiment on the cross-section of stock returns. It focuses on the largest and economically most relevant U.S. firms—the S&P 500 companies. The analysis shows that when beginning-of-period proxies for investor sentiment are low, firms with subjective valuation and firms that are difficult to arbitrage—that is, small (in terms of market capitalization), highly volatile, unprofitable, non-dividend-paying firms, that posses only few or no tangible assets and find themselves in extreme growth or distressed stages—earn high subsequent returns. Further examination reveals significant investor sentiment sensitivity of bond-like stocks as well. However, the impact of investor sentiment on those stocks is much less. Moreover, this study finds that the most appropriate and reliable characteristic of a stock which indicates subjectivity of valuation and difficulty to arbitrage is volatility.     «

This study analyzes the impact of investor sentiment on the cross-section of stock returns. It focuses on the largest and economically most relevant U.S. firms—the S&P; 500 companies. The analysis shows that when beginning-of-period proxies for investor sentiment are low, firms with subjective valuation and firms that are difficult to arbitrage—that is, small (in terms of market capitalization), highly volatile, unprofitable, non-dividend-paying firms, that posses only few or no tangible assets...     »