Gregory W. Brown and Michael T. Cliff examine the relationship between investor sentiment and asset valuation. They argue that excessive optimism can lead to overvaluation of assets, with market prices reverting to intrinsic values over time. Using survey data on investor sentiment, they find that sentiment is positively related to pricing errors and negatively related to future returns. These results are robust to the inclusion of other variables that predict stock returns. The authors use data from Investor's Intelligence to measure sentiment, tracking the number of market newsletters that are bullish, bearish, or neutral. They find that sentiment is highly persistent and strongly correlated with contemporaneous market returns, but not useful in predicting near-term returns. They also find that sentiment is significantly related to long-run stock returns, with high levels of sentiment resulting in significantly lower returns over the next 2 or 3 years. The authors test two main hypotheses: first, that excessive optimism leads to market overvaluation, and second, that high current sentiment is followed by low cumulative long-run returns as the market price reverts to its intrinsic value. They find strong support for both hypotheses, with sentiment being a significant predictor of future market valuations. The authors also examine the relationship between sentiment and pricing errors implied by a model. They find that sentiment is significantly related to long-run stock returns, with high levels of sentiment resulting in significantly lower returns over the next 2 or 3 years. These results are robust to the inclusion of control variables and econometric issues related to overlapping observations. The authors conclude that investor sentiment has a significant impact on asset valuations, with overly optimistic investors driving prices above fundamental values and these pricing errors tending to revert over a multi-year horizon. This pattern is consistent with the predictions of many behavioral models that prices underreact in the short run and overreact in the long run.Gregory W. Brown and Michael T. Cliff examine the relationship between investor sentiment and asset valuation. They argue that excessive optimism can lead to overvaluation of assets, with market prices reverting to intrinsic values over time. Using survey data on investor sentiment, they find that sentiment is positively related to pricing errors and negatively related to future returns. These results are robust to the inclusion of other variables that predict stock returns. The authors use data from Investor's Intelligence to measure sentiment, tracking the number of market newsletters that are bullish, bearish, or neutral. They find that sentiment is highly persistent and strongly correlated with contemporaneous market returns, but not useful in predicting near-term returns. They also find that sentiment is significantly related to long-run stock returns, with high levels of sentiment resulting in significantly lower returns over the next 2 or 3 years. The authors test two main hypotheses: first, that excessive optimism leads to market overvaluation, and second, that high current sentiment is followed by low cumulative long-run returns as the market price reverts to its intrinsic value. They find strong support for both hypotheses, with sentiment being a significant predictor of future market valuations. The authors also examine the relationship between sentiment and pricing errors implied by a model. They find that sentiment is significantly related to long-run stock returns, with high levels of sentiment resulting in significantly lower returns over the next 2 or 3 years. These results are robust to the inclusion of control variables and econometric issues related to overlapping observations. The authors conclude that investor sentiment has a significant impact on asset valuations, with overly optimistic investors driving prices above fundamental values and these pricing errors tending to revert over a multi-year horizon. This pattern is consistent with the predictions of many behavioral models that prices underreact in the short run and overreact in the long run.