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.