Predictive Value of Stock Message Board Sentiments

Online brokerages and message board providers have introduced community stock sentiments to influence investors in their trading decisions. Community stock sentiments reflect the average opinions of investors to either buy (bullish) or sell (bearish). However, it is unclear if these sentiments have informational value. This paper studies the predictive power of message board sentiments over future abnormal stock returns. The results show that message board sentiments have a negative but insignificant impact on stock abnormal returns in the subsequent two weeks. However, the negative impacts become both statistically and economically significant in the third week. Moreover, sentiments of investors who have correctly predicted recent stock movements are more negatively associated with future stock movements. The findings are consistent with psychological theories suggesting investors overreact to news and those who happen to predict correctly in the past are more likely to overreact. Based on the analysis, a trading strategy that involves buying stocks with low sentiments while selling stocks with high sentiments was implemented. The results indicated weekly returns ranging from 0.44% to 0.66%. [Note: We discovered an error in coding in the earlier paper with the same title. The abstract and paper have been updated.]