What’s Trending? Stock-Level Investor Sentiment and Returns

We study a direct, firm-level measure of investor sentiment derived from social media (BTSS sentiment). While related to firm fundamentals, BTSS sentiment contains a substantial non-fundamental component. We decompose sentiment into fundamental and pure sentiment and show that return predictability and reversal are primarily driven by the latter. Sentiment is persistent and systematic in the short term. High sentiment predicts elevated concurrent returns and subsequent reversal within a year. The effect is strongest in hard-to-value stocks, such as small and young firms, where limits to arbitrage are more binding.