Consumer sentiment and cost of equity: The role of product market uniqueness

We document a strong negative relation between consumer sentiment, proxied by the Michigan Consumer Sentiment Index, and the cost of equity capital, measured using analyst price targets, suggesting that market-wide sentiment affects prices. Furthermore, we investigate whether the relation between sentiment and cost of equity is affected by a firm’s product market. We show that the effect of consumer sentiment is more pronounced for firms with unique products (i.e. those having a high selling expense to sales ratio). Our findings are consistent with those observed in the finance literature that show a more pronounced effect from sentiment for highly volatile stocks.