Stock bubbles under sudden public crises: A perspective from the excessive financialization of firms

Abstract

This paper examines the crowding-out effect of the sudden onset of COVID-19 on the share price bubbles of over-financialized firms, and identifies the mechanisms responsible for this effect. Our findings suggest that COVID-19 has a significant crowding-out effect on the share price bubbles of over-financialized firms, which can be attributed to its impact on subjective investor sentiment and objective stock liquidity. The crowding-out effect is heterogeneous between different ownership, debt structure, and COVID-19 pandemic shocks. Our research suggests that the virtual economy may face a higher risk of the bubble bursting under the sudden public shock.