The purpose of this paper is to test whether investors take flight to safety when sentiment is low. In other words, do safe firms perform better than risky firms following periods of low sentiment.
Using cash flow volatility and the percent of bullish investors as proxies for risk and investor sentiment the paper tests the relationship between sentiment and returns conditional on risk this performance. Second, a cross-sectional analysis is conducted based on individual firm characteristics and sentiment to explain annual returns.
The paper finds that there is a negative relationship between investor sentiment and the return of risky companies, which is contrary to prior studies. All told, risky companies perform worse following periods of high investor sentiment.
This paper presents evidence contrary to extant literature and that there is no concerted flight to safety. Investor sentiment has little influence on safe stocks.
