The list of proxies used by researchers to value investor sentiment and to study its impact on
underpricing anomaly is very long. The most important proxies often used in researches and
empirical studies are: grey market prices, market conditions, demand submitted by individual
investors, discounts on closed-end funds and market-to-book ratio. Researches and empirical
works report that the higher is the investor sentiment and his optimism, the higher is the level
of underpricing.
In this study, I use the investors’ sentiment index:
The first measure is obtained from the survey data of the American Association of
Individual Investor (AAII): In July 1987, AAII started conducting a weekly sentiment survey
asking for the likely direction of the stock market during the next six months (up, down or the
same). The participants are randomly chosen from approximately 100,000 AAII members,
only subscribers to AAII are eligible to vote and they can only vote once during the survey
period.
Each week, AAII mails the questionnaires, and members fill them out and return them via US
mail. Each week AAII collects responses from Friday to the following Thursday, compiles the
results based on survey answers and labels them as bullish, bearish or neutral and reports the
results on Thursday or Friday. Since this survey is targeted towards individual investors, it is
primarily a measure of individual investors’ sentiment.
The second measure is obtained from the survey data of Investors Intelligence (II), an
investment service based in Larchmont, New York. II compiles its sentiment data weekly by
categorizing approximately 150 market newsletters since 1964. Data is based on a survey of
investment advisory newsletters. To overcome the potential bias problem towards buy
recommendations, letters from brokerage houses are excluded. Newsletters are read and
marked starting on Friday each week. The results are reported as percent bullish, bearish, or
neutral on the following Wednesday. Since authors of these newsletters are current or past
market professionals, the II series is interpreted as a measure for institutional investors’
sentiment.