Does investor sentiment affect stock price crash risk?

ABSTRACT

This study investigates the effect of investor sentiment on future stock price crash risk. Using a large sample of U.S. firms for the period 1991–2014, we find that firms are associated with greater likelihood of stock price crashes in high-sentiment period. The impact of investor sentiment on crash risk is more pronounced in firms with higher leverage ratio, greater default risk and larger analyst forecast dispersion. Overall, the results suggest that firm-level negative information is more likely to be withheld during high investor sentiment period, thus leading to a larger stock price crash risk.

KEYWORDS:

• Investor sentiment
• Stock price crash risk
• Bad news hoarding
• Operation uncertainty

JEL CLASSIFICATION:

• G12
• M41

Acknowledgments

This work is supported by the Fundamental Research Funds for the Central Universities (2016QD011, 2018JJ019). Yanan Zhang acknowledges the support by China's Management Accounting Research & Development Center in Central University of Finance and Economics.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Fundamental Research Funds for the Central Universities [2016QD011,2018JJ019].