Investor Sentiment and Information Demand

Abstract

We investigate how investor sentiment influences investor demand for financial information. Using two separate settings—earnings announcements and acquisition announcements—we find that as sentiment decreases, investor demand increases for SEC-regulated information that is highly detailed and relatively complicated to process. This result is consistent with psychology theory suggesting that during times of negative sentiment (i.e., pessimism), individuals are more likely to make decisions based on detailed information that requires high processing costs. Furthermore, consistent with our expectations, we find that the effects of sentiment on information demand are affected by other factors conveyed in the earnings announcement setting that can signal the need for more detailed information, such as the magnitude of the earnings surprise and firm distress. We also find that as sentiment increases, investor demand increases for higher level (summary) information that is obtained from Google ticker searches. Combined with our primary results on SEC information, these results are consistent with the notion that during times of optimism, investors rely less on complex information and are more likely to use simple heuristics that require less cognitive effort to process. Our study provides new insights on how sentiment influences investor demand for information, which has significant implications for price discovery.