A nonrandom walk down Hollywood boulevard: Celebrity deaths and investor sentiment

• Published date: 01 August 2021
• Author: Gabriele M. Lepori
• Date: 01 August 2021
• DOI: http://doi.org/10.1111/fire.12254

DOI: 10.1111/fire.12254

ORIGINAL ARTICLE

A nonrandom walk down Hollywood boulevard:

Celebrity deaths and investor sentiment

Gabriele M. Lepori

Department of Banking and Finance,

Southampton Business School, University of

Southampton, Southampton, UK

Correspondence

GabrieleM. Lepori, Department of Banking

andFinance, Southampton Business School,

Universityof Southampton, Highfield Campus,

SouthamptonSO17 1BJ, United Kingdom.

Email:g.m.lepori@soton.ac.uk

Abstract

Motivated by psychological evidence that shows the pub-

lic experiences emotional distress in response to the deaths

of popular figures, I employ the deaths of 1,391 Hollywood

Walk of Fame celebrities as natural experiments to iden-

tify exogenous public mood changes over the period 1926–

2009. Consistent with the psychological theories which

maintain that sadness encourages individuals to favor high-

risk/high-reward investments, I find that U.S. stock returns

are abnormally high immediately after the death of a major

celebrity. This effect is particularly large during periods of

high market-leveluncertainty (+0.40%) and for stocks head-

quartered in the city where the celebrity died (+0.26%).

KEYWORDS

investor sentiment, celebrity deaths, risk taking, local tradingbias

JEL CLASSIFICATION

G02, G11, G12, G14

1INTRODUCTION

In modern society,the lives and tribulations of so-called celebrities attract the interest of millions of people. Psychol-

ogists have long documented that fans exhibitan obsessive fascination with their favorite actors, singers, and the like;

this fascination is so strong that fans tend to identify themselves and developimaginary relationships with them (Levy,

1979). Though all the interaction is one-way,such relationships are experienced as real, and audiences tend to look to

media personalities as “real friends” (Hall & Reid, 2009). It follows from this that ordinary people often feel emotion-

ally involved with celebrities. Forexample, when singer Michael Jackson died in 2009, a massive public outpouring of

grief immediately took place in the United States and across the globe (Sanderson & Cheong, 2010). History shows

that such emotional reactions are far from uncommon in response to the deaths of popular and beloved celebrities.

Financial Review. 2021;56:591–613. wileyonlinelibrary.com/journal/fire ©2020 The Eastern Finance Association 591

592 LEPORI

Rudolph Valentino, Elvis Presley,John Lennon, Princess Diana, and Steve Irwin (aka “the crocodile hunter”) are just a

few major examples of celebrities whose deaths sent emotional shock wavesthrough the Western world.

Human tragedy aside, these events represent natural experiments that can help economists to investigate how

incidental mood changes affect people’s decisions involving risk.1Incidental mood is mood “that is unrelated to the

decision at hand” and may originate from disparate sources (Loewenstein & Lerner,2003). After reviewing the past

35 years of work on the relation between mood and decision making, Lerner, Li, Valdesolo,and Kassam (2015) con-

cluded that “incidental emotions often produce influences that are unwanted and nonconscious” and “many psycho-

logical scientists now assume that emotions are, for better or worse, the dominant driverof most meaningful decisions

in life.” Andrade (2005) summarizes the two main streams of research on the impact of mood on risk taking: according

to the dynamic affect regulation theories, negative mood encourages people to choose high-risk/high-reward options

to repair their moods; and, according to the static affect evaluation theories, instead, negative mood “bias[es] evalua-

tive judgment and actions in a congruent manner,” promoting more pessimistic views and inducing individuals to shy

away from risk.

In this study,I employ celebrity deaths as a source of exogenous changes in the mood of the U.S. public, which allows

me to estimate the impact of incidental mood changes on the demand for risky assets. My empirical strategy is moti-

vated by three basic facts: (i) media communication scholars and psychologists have documented that the emotional

attachment that ordinary people develop toward celebrities can be so strong that the deaths of major celebrities may

send negativeemotional waves through large portions of the population; (ii) celebrity culture is pervasive in the United

States (e.g., Kurzman et al., 2007), and historical daily data about the dynamics of the U.S. stock marketare available

going back to the 1920s, which is precisely when the celebrity phenomenon began to flourish (Leff, 1997); and (iii)

“[t]he U.S. equity market is characterized by widespread direct stock ownership byretail investors,” who “spend far

less time on investment analysis” than institutional investors (Kumar & Lee, 2006). Moreover, the former’s decisions

and expectationsare more sensitive to fluctuations in sentiment than the latter’s (Kostopoulos & Meyer, 2020). There-

fore, it is plausible to hypothesize that the deaths of popular celebrities affect the net demand forrisky assets through

their influence on unsophisticated investors’ moods and risk-taking propensities.

For the empirical analysis I rely on a sample of 1,391 deaths (from 1926 to 2009) of public figures who were

inducted into the Hollywood Walk of Fame (HWF) and consequently were unambiguously recognized as celebrities

by the U.S. public. Controlling for economic news, seasonalities, and behavioralfactors, I estimate that the death of a

major celebrity is immediately followed by an abnormal 0.16% increase in stock returns. As the discussion in Section 7

will make clear, the size of this effect is practicallyrelevant when compared with (1) the average size of the effects

reported in sentiment studies published in leading finance journals, (2) typical trading costs for institutional investors,

and (3) the effects of scheduled macroeconomic announcements to which the public usually pays close attention.

This finding is consistent with the dynamic affect regulation theories, according to which the negative public mood

spurred by the death of a major celebrity is expectedto promote risk-prone behavior and increase the net demand for

risky assets. Consistent with the view that increased risk-taking is the mechanism behind the observed phenomenon,

I find that lottery sales increase after major celebrity deaths. Furthermore, consistent with the interpretation that the

celebrity-death effect is driven by investor mood changes, I find that (i) the size of the marketreaction to a celebrity

death is increasing in the popularity of the deceased celebrity; (ii) the market reaction is weakerin response to a death

that is, to some extent, expected and gives the public more time to prepare psychologically; (iii) the marketreaction

is stronger and economically large (+0.40%) when market-level uncertainty is higher, and consequently unsophisti-

cated investors can plausibly defend a wide rangeof stock valuations; (iv) consistent with the investor sentiment liter-

ature (e.g., Baker& Wurgler, 2006), the celebrity-death effect is stronger in portfolios of stocks that are more difficult

to value and harder to arbitrage; (v) the celebrity-death effect is weakest in the largest-cap segment, which is domi-

nated by institutional investors, and strongest in the high-book-to-market ratiosegment, which is one of the “natural

1Moodcan be considered as a special case of market sentiment (see Baker & Wurgler, 2006). In this paper,as it is common in the behavioral finance literature,

Iuse the terms sentiment, mood, affect, and emotions interchangeably.