Contents lists available at ScienceDirect Research in International Business and Finance journal homepage: www.elsevier.com/locate/ribaf Full length Article Stock market reactions to domestic sentiment: Panel CS-ARDL evidence Walid M.A. Ahmed Department of Business Administration, Faculty of Business, Ain Shams University, P.O. Box 11566, Cairo, Egypt ARTICLEINFO JEL classification: C52 F14 G12 Q43 Keywords: Business sentiment Consumer sentiment Dynamic h Dynamic heterogeneous panels Cross-sectional dependence Cross-sectionally augmented ARDL ABSTRACT This study sets out to explore the efects of business and consumer sentiment on stock market performance, within the separate contexts of advanced and emerging markets. The empirical analysis is carried out using the cross-sectionally augmented autoregressive distributed lag (CS- ARDL) modeling approach, which considers time dynamics, cross-sectional heterogeneity, and cross-sectional dependence. The fndings fordevelopedmarketssuggestthatbusinesssentiment haspositiveleadingefectsonstockreturns,acrossshort-andlong-termtimehorizons,while for emerging markets, the price impact of business sentiment turns out to be short-lived. On the other hand, consumer sentiment tends to afect positively both market types, albeit only in the shortrun.Furthermore,theinfuenceofsentimentindicatorsseemstobestrongerinemerging- than in developed-market countries. The results remain robust, even after controlling for a rich rangeofpotentialpredictorsofstockreturns.Generally,suchevidencehighlightstherelevance of psychological factors, such as business and consumer sentiment, in determining the future trajectory of asset prices. 1. Introduction In a world of market imperfections and growing uncertainty, agents’ sentiment about future economic trends continues to be a vitalcomponentofbusinessand fnancialanalysis.People’sdecisionstoconsume,save,orinvesttendto feedontheirexpectations with respect to economic performance in the near term, particularly in the absence of reliable information on underlying funda- mentals. For instance, if consumers are upbeat (downbeat) about their fnances, they are likely to spend more (less) and save less (more).Similarly,ifproducersandbusinessownersfeeloptimistictowardstheeconomyandbusinessprospects,theywillbemore motivated to hire, invest, and expand, which perhaps ultimately contribute to stimulating employment, production, and economic growth.Incontrast,apervasivemoodofpessimismamongbusinessleadersandprofessionalscouldcastalingeringshadowonfuture economicactivity. Batchelor(2001) arguesthatifhouseholdsandbusinesseshaverationalperceptionsandexpectations,highlevels of consumer and business confdence indicators are more probable to augur well for economic growth. Nevertheless, this is not suggestiveofamereunidirectionallinkbetweenprevailingconfdencelevelsandmacroeconomic fundamentals,sincethevagariesof economic cycles and fuctuations do impinge on market sentiment Aspointedoutby Barberisetal.(1998) and Chauetal.(2016),amongothers,sentimentrefectsthegeneralattitudethatagents (e.g.,consumers,producers,investors)holdtowardsaparticularasset,industry,market,ortheoverallhealthofaneconomy.Such attitudes can have grave implications for economic activity and fnancial market developments. In reality, investors, analysts, and regulators are increasingly attentive to the information content of market sentiment indices, since these survey-based leading https://doi.org/10.1016/j.ribaf.2020.101240 Received8April2019;Receivedinrevisedform23April2020;Accepted9May2020 E-mail address: wmaziz@commerce.asu.edu.eg. Research in International Business and Finance 54 (2020) 101240 Available online 26 May 2020 0275-5319/ © 2020 Elsevier B.V. All rights reserved. T