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• W3125259122 abstract "ABSTRACTWe study investor overreaction using data for five major stock market crashes during the 1987-2008 period. We find some evidence of investor overreaction in all five stock market crashes. The prices of stocks investors bid down more than the average during crashes tend to increase more than the average in post-crash market reversals. In line with CAPM, we find that high beta stocks lose more value in crashes and gain more value in post-crash market reversals relative to low beta stocks. We further find that smaller firms and those with a low market-to-book ratio lose more value in stock market crashes. However, they do not gain more value in post-crash market reversals, implying that investor reaction against these firms in stock market crashes is not an overreaction. In examining industry-specific behavior, our results indicate that investors overbid down the prices of high-tech stocks in the 1997 crash and manufacturing stocks in the 2008 crash relative to other stocks. However, the prices of stocks in these industries increased more than other stocks in the post-crash market reversals, implying investor overreaction for these industries in these stock market crashes.JEL: G00, G01, G10, G14KEYWORDS: Stock Market Crash, Post-Crash Market Reversal, Determinants of Stock Returns, Investor Overreaction(ProQuest: ... denotes formulae omitted.)INTRODUCTIONIn this paper, we study investor overreaction using data for five major stock market crashes during the 1987-2008 period. A stock market crash is commonly defined as a sudden dramatic decline of stock prices across a significant cross-section of a stock market. There is no generally accepted threshold for duration or magnitude for the decline in stock prices. Wang et al. (2009) and Gulko (2002) define a stock market crash as 5% or greater decrease in stock prices in a single trading day. In this paper, we study the stock market crashes with a minimum of 9.8% cumulative decline in stock prices in several consecutive trading days.Stock market crashes are generally followed by several days of sharp market reversal. If there is an overreaction towards stocks with certain financial characteristics during a crash, the reaction is reversed with a sharp market correction during the post-crash market reversal period. For instance, Wang et al. (2013) find that investors overreacted to the technical insolvency risk and bankruptcy risk characteristics of firms by bidding down their stock prices sharply in the 2008 crash. These stocks gained more value relative to other stocks in the post-crash market reversal. In this study, following the methodology used in Wang et al. (2013), we compare the crash and post-crash market reversal periods to determine if there was any investor overreaction in the five most important stock market crashes of the 1987-2008 period. The crash and post-crash market reversal periods included in the study are presented in Table 1.Our research makes several important contributions to the literature. We document a consistent pattern of investor overreaction in a large cross-sectional sample across five of the most significant stock market crashes of the past three decades. We also find that different stock characteristics had varying impact on the magnitude of overreaction among the events included in our study. The paper is organized as follows: The next section examines prior related literature. We then provide information about our data and methodology, and follow with a presentation of our results on stock market crashes during the crash and recovery periods. In the final section, we conclude the paper and note suggestions for future research.LITERATURE REVIEWStock market crashes have received considerable attention in finance literature. Arshanapalli and Doukas (1993) and Lau and McInish (1993) study the co-movements of the world's stock markets before and after the 1987 stock market crash. …" @default.
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• W3125259122 date "2015-09-01" @default.
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• W3125259122 title "Investor Reaction in Stock Market Crashes and Post-Crash Market Reversals" @default.
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