Overnight Returns and Investor Sentiment

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Summary

The article evaluates whether a stock’s overnight return, measured from the prior close to the next open, can proxy for firm-level investor sentiment. The rationale is that retail investors may place orders outside regular market hours, concentrating demand at the next opening and creating temporary price pressure. Using US stock data from 1992 to 2013, the study sorts stocks by overnight returns and examines subsequent weekly and longer-horizon performance, with comparisons across valuation difficulty and institutional ownership groups.

High overnight-return stocks show stronger overnight returns in following weeks, especially among firms considered harder to value and those with lower institutional ownership. Yet stocks with the highest overnight returns subsequently underperform those with the lowest over the next year. The authors also report that sentiment measured this way is associated with weaker price responses to earnings news when investors appear optimistic. These patterns support the proposed proxy, but they are observational findings from a particular historical sample; the measure is an indirect sentiment indicator and does not establish that overnight returns alone cause mispricing or provide a standalone trading strategy.

Key ideas

The study treats close-to-open stock returns as a possible proxy for firm-specific investor sentiment.
Stocks with high overnight returns tend to retain relatively high overnight returns over the following weeks.
Short-term persistence is stronger among harder-to-value firms and firms with lower institutional ownership.
Stocks with high overnight returns underperform low overnight-return stocks over the following year.
The reported association between optimism and earnings-announcement reactions is consistent with sentiment affecting prices, but does not establish causality.

Overnight Stock Returns as a Firm-Specific Investor Sentiment Measure

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Key ideas

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