The Implication of Investor Optimistic Sentiment on Future Stock Price Crashes

The study offers a novel empirical investigation of the effect of investor optimistic sentiment on future stock crash risk. The daily data of the Chinese stock market from December 1990 to May 2023 were used to map the empirical analysis, while the PCA technique was applied to build the investor sentiment index. The finding revealed a positive and significant association between optimistic sentiment and future stock crash risk. The results remain consistent after a series of robust tests, including alternative crash risk measures and the winsorization of accounting variables. Additional analysis using the COVID-19 pandemic sample data revealed a non-significant effect of optimistic sentiment on future stock crash risk when uncertainty is decreased at the firm level. The study deduced that investors concerned with the stock price risk should be vigilant with active margin trading with a strong speculative appeal when the market sentiment is high.