Investor sentiment and stock price crash risk: The mediating role of analyst herding

Abstract

This study analyzes the impact of investor sentiment on firm's stock price crash risk by using Chinese A-Share firms data this study assesses the potency and existence of a relationship between crash risk and investor sentiment in the Chinese stock market and introduces analyst herding as a mediating variable for explaining the relationship between crash risk and investor sentiment. By utilizing a large data set of A-share listed firms on Chinese stock exchanges, comprising of 19,371 firm-year observations for the period of 2004–2019, an investor sentiment index is constructed. Results point towards a positive significant relation between stock price crash risk and investor sentiment. Furthermore, stock price crash is positively correlated with analyst herding i.e. it significantly mediates between stock price crash risk and investor sentiment. By measuring the relationship between crash risk, investor sentiment, and analyst herding this study provides systematic support on the mediating role of analyst herding in deepening the market sentiment which results in crash risk. These findings are robust by utilizing alternate proxies and controlling for firm specific variables, economy-wide shocks, and time trends year fixed effects.