Influence of limited attention and over-optimism of investors on stock price crash risk

Abstract

In the stock market investors generally have limited attention. It is difficult for them to interpret complex information in an accurate and timely manner. Thus, the investors tend to make decisions based on inherent optimistic beliefs. This paper aims to identify the influence of limited attention and over-optimism of investors on stock price crash risk. First, the author reviewed the literature on economic consequences of corporate fmancialization and determinants of stock price crash risk. Then, several hypotheses were put forward on how the limited attention and over-optimism of investors affect the stock price crash risk in the context of the fmancialization of industrial companies. The hypotheses were tested through an empirical analysis on the data of industrial companies listed in China's A-share market between 2008 and 2018. The results show that the complex financial activities of industrial companies magnify the defects of the limited attention and over-optimism of investors, and increase the stock price crash risk; over-optimism has a major impact on asset pricing. The research results provide new evidence of the impacts of psychological factors on the stock market.