Investor trading behaviour and stock price crash risk

• Date: 01 January 2019
• Published date: 01 January 2019
• Author: Liyun Zhou,Jialiang Huang
• DOI: http://doi.org/10.1002/ijfe.1659

RESEARCH ARTICLE

Investor trading behaviour and stock price crash risk

Liyun Zhou

1

| Jialiang Huang

2

1

College of Economics and Management,

South China Agricultural University,

Guangzhou, China

2

School of Management, Guangzhou

University, Guangzhou, China

Correspondence

Jialiang Huang, School of Management,

Guangzhou University, Guangzhou

510006, China.

Email: mrwong1989@foxmail.com

Funding information

Guangdong Planning office of Philosophy

and Social Science, Grant/Award Num-

bers: GD17XLJ04 and GD17XGL14;

Department of Education of Guangdong

Province, Grant/Award Number:

2017WQNCX014; Natural Science Foun-

dation of Guangdong Province, Grant/

Award Number: 2018A030310218; Natural

Science Foundation of China, Grant/

Award Number: (71803051); the social

science foundation of Chinese Education

Ministry, Grant/Award Number:

(18YJCZH055)

JEL Classification: G1; G10; G12

Abstract

This paper sheds new light on the relation between investor trading behaviour

and crash risk to examine how investors react to stocks with lottery features in

Chinese Stock Market. We find that investor trading behaviour has a greater

impact on stocks with higher crash risk, which implies that investors overreact

to stocks with higher stock price crash risk. Furthermore, investor trading

behaviour has strongest effects on stocks with highest crash risk and highest idi-

osyncratic risk and has weakest effects on stocks with lowest crash risk and low-

est idiosyncratic risk, which indicates that investors gamble lottery‐like stocks

with high crash risk and high idiosyncratic risk. Collectively, these results sup-

port a role for investor trading behaviour in the formation of stock returns.

KEYWORDS

idiosyncratic risk, investor trading behaviour, lottery‐likestocks, stock price crash risk

1|INTRODUCTION

It is well established that stock price crash risk is an impor-

tant issue in financial markets. As one of the most studied

risks, stock price crash risk, defined as the conditional

skewness of return distribution, captures asymmetry in

risk. The literature on stock price crash risk has been

growing since Chen, Hong, and Stein (2001). Theoretically

and empirically, much research focuses on the importance

of stock price crash risk from different perspectives, such

as different of opinions (Hong & Stein, 2003), corporate

tax avoidance (J. B. Kim, Li, & Zhang, 2011), corporate

social responsibility (Y. Kim, Li, & Li, 2014), institutional

investors (An & Zhang, 2013), short interest (Callen &

Fang, 2015), investor sentiment (Yin & Tian, 2017), and

employee welfare (Ben‐Nasr & Ghouma, 2018). Overall,

ample empirical evidence demonstrates the existence and

importance of stock price crash risk.

Blume, MacKinlay, and Terker (1989) investigate the

investor trading behaviour (order imbalance) around the

October 1987 crash. In fact, ample empirical evidence also

investigates how investor trading behaviour affects stock

prices, such as investor activities and return comovements

(Barber, Odean, & Zhu, 2009; Hvidkjaer, 2006, 2008;

Kumar & Lee, 2006; Malmendier & Shanthikumar, 2007;

Qian, 2014; Yang & Zhou, 2015), investor activities, and

risk (Chen et al., 2014; Chordia, Roll, & Subrahmanyam,

2002; Han & Kumar, 2013; Kumar & Lee, 2006).

Following these researches and investor trading

behaviour effect around stock price crash, people have

shown interest in investigating whether the so‐called

speculative activity impacts the level of stock prices and

Received: 11 January 2018 Revised: 10 August 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1659

Int J Fin Econ. 2019;24:227–240. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 227