We find that Baker and Wurgler's Investor Sentiment Index affects the O/S-return relation after controlling for consumer sentiment indices and economic environment factors.
Furthermore, numerous studies adopt consumer sentiment indices as alternative measures of investor sentiment (Lemmon and Portniaguina, 2006; Antoniou, Doukas, and Subrahmanyam, 2013).
Many researchers and practitioners are interested in consumer sentiment indices, such as the consumer confidence index provided by the Michigan Consumer Sentiment Index (MCSI) and that of the Conference Board (CB).
Johnson and So (2012) use a firm-specific measure of short sale constraints, while we deal with market-wide sentiment indices. Thus, we can concurrently analyze the effect of short sale constraints on each individual stock and on the entire stock market on the return predictive power of O/S.
To investigate the unique effect of the BW Investor Sentiment Index on the O/S-return relation, we also conduct univariate and multivariate analyses after taking into account the consumer sentiment indices. As a result, we find the effect of the BW Investor Sentiment Index to be stronger than those of consumer sentiment indices.
Prior studies concentrate on the similarities between investor sentiment and consumer sentiment and these studies generally use consumer sentiment indices as alternative measures of investor sentiment in the stock market.
The questions related to both consumer sentiment indices are divided into two parts: (1) the present situation component and (2) the expectations component.
We also provide the correlation table for the B W Investor Sentiment Index, the consumer sentiment indices, the Chicago Fed National Activity Index (CFNAI), and past market returns.
Table II includes the two consumer sentiment indices: the MCSI and the CB Index.
With regard to the sentiment measurement, the literature employs three representative sentiment indices: (1) the BW Investor Sentiment Index, (2) the MCSI, and (3) the CB Index.
To remove the macroeconomic information from the raw consumer sentiment indices, we follow the approach used in the literature.