Incorporating firm fundamentals and investor sentiment into stock return assessment

Each and every day you can read online about or listen on television about a particular stock or industry that is going change according to "buzz" that is floating around. Is it a good idea to take into account this "buzz" or investor sentiment, when making one's decision on an investment? Or maybe we should completely ignore any kind of "buzz" and stick only to the numbers of the financial statements and annual reports? This paper will attempt to create a model where in both financial statement analysis techniques and investor sentiment measurement can be taken into account in order to help an investor make a more thorough decision on an investment. Using prior studies from Feltham-Ohlson (1995) for financial statement analysis, I will attempt to incorporate a weighted model using investor sentiment surveys from the American Association of Individual Investors (AAII hereafter). The results of the model, through regression analysis, show that incorporating investor sentiment along with Feltham-Ohlson framework aid in the explanation in stock valuation.