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Overnight Returns and Firm-Specific Investor Sentiment

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

Journal of Financial and Quantitative Analysis · 2018 · Volume 53 · Issue 2

DOI: 10.1017/S0022109017000989

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.

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