Investor sentiment and stock returns: Wenchuan Earthquake

This paper exploits a natural experiment (the Wenchuan Earthquake in China) to study the effects of investor sentiment on stock returns. We find that during the 12 months following the earthquake, stock returns are significantly lower for firms headquartered nearer the epicenter than for firms further away. Further analyses indicate that this pattern of stock returns does not exist before or long after the earthquake, and cannot be explained by actual economic losses or a change in systematic risk. Overall, our evidence is consistent with the interaction of local bias and investor sentiment affecting stock returns.

► We study the effects of the Wenchuan Earthquake on investor sentiment and stock returns. ► Stock returns are lower for firms nearer the epicenter than for firms further away. ► This pattern of stock returns does not exist before or long after the earthquake. ► The anomaly cannot be explained by actual economic losses or change in beta. ► The anomaly is likely driven by the interaction of local bias and investor sentiment.