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Behavioral theories posit that investor sentiment exhibits predictive powerfor stock returns, whereas there is little study have investigated therelationship between the time horizon of the predictive effect of investorsentiment and the firm characteristics. To this end, by using a Grangercausality analysis in the frequency domain proposed by Lemmens et al. (2008),this paper examine whether the time horizon of the predictive effect ofinvestor sentiment on the U.S. returns of stocks vary with different firmcharacteristics (e.g., firm size (Size), book-to-market equity (B/M) rate,operating profitability (OP) and investment (Inv)). The empirical resultsindicate that investor sentiment has a long-term (more than 12 months) orshort-term (less than 12 months) predictive effect on stock returns withdifferent firm characteristics. Specifically, the investor sentiment has strongpredictability in the stock returns for smaller Size stocks, lower B/M stocksand lower OP stocks, both in the short term and long term, but only has ashort-term predictability for higher quantile ones. The investor sentimentmerely has predictability for the returns of smaller Inv stocks in the shortterm, but has a strong short-term and long-term predictability for larger Invstocks. These results have important implications for the investors for theplanning of the short and the long run stock investment strategy.

Does the time horizon of the return predictive effect of investor  sentiment vary with stock characteristics? A Granger causality analysis in  the frequency domain