Positive information shocks, investor behavior and stock price crash risk

Abstract

This article explores the impact of positive information shocks on investors’ trading behavior and the related stock price crash risk. We use cumulative positive jump returns to measure the positive information shocks and find that these shocks exacerbate crash risk. Moreover, retail investor attention, over-optimistic investor sentiment, and retail trades are channels for this exacerbation. We also provide evidence that the effect of the information shocks varies across firm characteristics and aggregate states. It is stronger for firms with large-cap, long listing times, and state-owned structures and during over-optimistic aggregate states. Overall, our results shed light on investor trading behavior and market risk related to unexpected information shocks, which helps detect and diagnose potential market instability.