The short of it: Investor sentiment and anomalies
Robert F. Stambaugh, Jianfeng Yu c, Yu Yuan

The authors consider that sentiment may partly explain the returns to equity pricing anomalies by combining two concepts. The first concept is that investor sentiment has a market wide component with the potential to affect the stock prices in the same direction at the same time. The second concept concerns about the impediments to short selling like mutual funds being prohibited by their charter or deterrence of individuals due to risks in arbitrage, limited knowledge, cost involved etc. Hence it has been rightly said that “It is not as easy to short as it is to go out and buy a stock”.
They also identified 11 anomalies that are partly explained by sentiment related mispricing. Some of the anomalies are related to financial distress, net stock issues and equity issuance, asset growth, net operating assets, momentum etc. They also used the Baker and Wurgler market wide investor sentiment index to explore the sentiment effects
They develop and test three hypotheses that result from combining the presence of market-wide sentiment with short sale argument. They are as follows: 1) Anomalies should be stronger following high sentiment as the most optimistic views will be very optimistic and will result in considerable overpricing as compared to low sentiment period where, the optimistic views will be by rational investors and hence less mispricing. Moreover, selling a stock short by betting on price drop is harder than buying stocks on price gain. Hence stocks are more likely to be over-priced when sentiments are high as compared to under-priced when sentiments are low.
It was found from the tables that all 11 anomalies were stronger following high levels of investor sentiment. When averaged across anomalies, 70% of the benchmark adjusted profits were in months following levels of investor sentiment above their median value.
The first hypothesis also predicts a positive relation between the profitability of the spread and investor sentiment. This is proved by the positive slope coefficients for the spread of 11 anomalies.

2) Short leg of long-short anomaly strategy should have lower return following high sentiment period. Short selling is more profitable when over-priced securities fall drastically.
This was seen in all the 11 anomalies in the table. When averaged across anomalies, 78% of the benchmark adjusted profits occurred in the months following high sentiments.
According to this hypothesis, there should be a negative relationship between the returns and the sentiment level. This is proved by negative slope coefficients of all 11 anomalies. 3) Long leg of the long-short strategies should have similar returns following high and low sentiments. Any sentiment related over-pricing is minimal on long side as unlike short selling, there exists no impediments to stock purchases thereby making under-pricing unlikely.
There is a noticeable difference for this anomaly. The coefficients for the long-leg returns are all negative and only 5 are significant at 0.05 significance level.