Survey_BW_2006b

Abstract

The firm-level data are from the merged CRSP-Compustat database. The sample includes all common stock (share codes 10 and 11) between 1962 through 2001. Following Fama and French (1992), we match accounting data for fiscal year-ends in calendar year t ? 1 to (monthly) returns from July t through June t + 1, and we use their variable definitions when possible. Prior work suggests a number of proxies for sentiment to use as time-series conditioning variables. There are no definitive or uncontroversial measures, however. We therefore form a composite index of sentiment that is based on the common variation in six underlying proxies for sentiment: the closed-end fund discount, NYSE share turnover, the number and average first-day returns on IPOs, the equity share in new issues, and the dividend premium. The sentiment proxies are measured annually from 1962 to 2001. We first introduce each proxy separately, and then discuss how they are formed into overall sentiment indexes. We form a composite index that captures the common component in the six proxies and incorporates the fact that some variables take longer to reveal the same sentiment.9 We start by estimating the first principal component of the six proxies and their lags. This gives us a first-stage index with 12 loadings, one for each of the current and lagged proxies. We then compute the correlation between the first-stage index and the current and lagged values of each of the proxies. Finally, we define SENTIMENT as the first principal component of the correlation matrix of six variables—each respective proxy’s lead or lag, whichever has higher correlation with the first-stage index—rescaling the coefficients so that the index has unit variance.