Download pdf
Investor sentiment and stock price crash risk: internal control as a mediator in Chinese markets
- 1 School of Management and Economics, Beijing Institution of Technology University, Beijing, 102400, China
- 2 School of Mathematics and Physics, China University of Geosciences, Wuhan, 430070, China
* Author to whom correspondence should be addressed.
Abstract
Social media's rise has intensified investor sentiment in financial markets, driving heightened stock price volatility and crash risk. In this context, exploring how internal control quality mediates sentiment and crash risk is vital for developing governance tools to stabilize markets in the digital age. This study investigates the relationship between investor sentiment, internal control quality, and stock price crash risk using a sample of Chinese A-share listed companies from 2007 to 2022. Leveraging financial data and a robust empirical framework, the study finds that higher investor sentiment significantly exacerbates stock price crash risk, particularly in firms with internal control deficiencies and state-owned enterprises (SOEs). Mediation analysis reveals that investor sentiment deteriorates internal control quality, amplifying crash risk and underscoring the critical role of governance mechanisms in mitigating market instability.
Keywords
investor sentiment, stock crash, internal control, stock market
[1]. China Internet Network Information Center (CNNIC). (2025). The 55th Statistical Report on China's Internet Development. http://100ec.cn/Public/Upload/file/20250120/1737335916881378.pdf
[2]. Hong, H., & Stein, J. C. (2003). Differences of opinion, short-sales constraints, and market crashes. Review of Financial Studies, 16(2), 487-525.
[3]. Xu, N., Yu, S., & Yi, Z. (2013). Herd behavior of institutional investors and the risk of stock price collapse. Guanli Shijie (Managing the World), (7), 31-43.
[4]. Fu, J., Wu, X., Liu, Y., & Chen, R. (2021). Firm-specific investor sentiment and stock price crash risk. Finance Research Letters, 38, 101442.
[5]. Fu, F., Fang, J., Yang, M., & Yao, S. (2024). Institutional investor horizons and stock price crash risk. Research in International Business and Finance, 72, 102509.
[6]. Pan, N., Xu, Q., & Zhu, H. (2021). The impact of investor structure on stock price crash sensitivity: Evidence from China's stock market. Journal of Management Science and Engineering, 6(3), 312-323.
[7]. Cao, F., Lu, B., Li, Z., & Xu, K. (2015). Have institutional investors reduced the risk of stock price collapse? Kuaiji Yanjiu (Accounting Research), (11), 55-61.
[8]. Sun, K., & Xiao, X. (2018). The impact mechanism of Internet social media on investor sentiment contagion and stock price crash risk. Jishu Jingji (Technical Economics), 37(6), 93-102.
[9]. Li, F., & Jiang, Y. (2022). Institutional investor networks and crash risk: Evidence from China. Finance Research Letters, 47, 102627.
[10]. Zhu, Y., Wu, Z., Zhang, H., & Yu, J. (2017). Media sentiment, institutional investors and probability of stock price crash: Evidence from Chinese stock markets. Accounting & Finance, 57(5), 1635-1670.
[11]. China Securities Regulatory Commission. (2021). Twenty Typical Illegal Cases of Securities Supervision in 2020. http://www.csrc.gov.cn/csrc/c100/c05c3c6021484871d8cf84f9f39b/content.shtml
[12]. Barberis, N., Shleifer, A., & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307-343.
[13]. Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns. Journal of Finance, 61(4), 1645-1680.
[14]. Valle-Cruz, D., Fernandez-Cortez, V., Lopez-Chau, A., & Sandoval-Almazan, R. (2022). Does Twitter affect stock market decisions? Financial sentiment analysis during pandemics: A comparative study of the H1N1 and the COVID-19 periods. Cognitive Computation, 14(1), 372-387.
[15]. Cheng, W., & Lin, J. (2013). Investor sentiment on social media and securities market indices. Journal of Management Science, 26(5), 111-119.
[16]. Lai, K., Chen, H., & Le, G. (2014). Can emotions predict the stock market? Advances in Psychological Science, 22(11), 1770-1781.
[17]. Valle-Cruz, D., Fernandez-Cortez, V., Lopez-Chau, A., & Sandoval-Almazan, R. (2022). Does Twitter affect stock market decisions? Financial sentiment analysis during pandemics: A comparative study of the H1N1 and the COVID-19 periods. Cognitive Computation, 14(1), 372-387.
[18]. Jing, N., Wu, Z., & Wang, H. (2021). A hybrid model integrating deep learning with investor sentiment analysis for stock price prediction. Expert Systems with Applications, 178, 115019.
[19]. Valle-Cruz, D., Fernandez-Cortez, V., Lopez-Chau, A., & Sandoval-Almazan, R. (2022). Does Twitter affect stock market decisions? Financial sentiment analysis during pandemics: A comparative study of the H1N1 and the COVID-19 periods. Cognitive Computation, 14(1), 372-387.
[20]. Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61(3), 345-381.
[21]. Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics, 94(1), 67-86.
[22]. Jin L., and S. C. Myers. R2 around the world: New theory and new tests[J]. Journal of Financial Economics, 2006, 79(2): 257-292.
[23]. Kim, J. B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: Firm-level analysis. Journal of Financial Economics, 100(3), 639-662.
[24]. Kim, J. B., Li, Y., & Zhang, L. (2011). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101(3), 713-730.
[25]. Chen, J., Chan, K. C., Dong, W., & Zhang, F. (Frank). (2016). Internal Control and Stock Price Crash Risk: Evidence from China. European Accounting Review, 26(1), 125–152.
[26]. Amin, K., Eshleman, D., & Guo, P. (2021). Investor sentiment and audit opinion shopping. Auditing: A Journal of Practice & Theory, 40(3), 1-26.
[27]. Lu Dong, Fu Peng,&Yang Dan (2015). Media type, media attention and internal control quality of listed companies Accounting Research, (4), 78-85.
[28]. Kim, J.-B., & Zhang, L. (2014). Financial reporting opacity and expected crash risk: Evidence from implied volatility smirks. Contemporary Accounting Research, 31(3), 851–875.
[29]. Lei, G., Wang, W., & Jin, X. (2012). Corporate governance quality, investor confidence, and stock returns. Kuaiji Yanjiu (Accounting Research), (2), 79-86+97.
[30]. Tang, W., Cui, Y., & Luo, M. (2017). Investor sentiment and corporate innovation investment: Intermediary channels based on managerial overconfidence. Journal of Beijing Technology and Business University (Social Sciences Edition), 32(4), 66-77. https://doi.org/10.16299/j.1009-6116.2017.04.007
[31]. Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61(3), 345–381. doi:10.1016/s0304-405x(01)00066-6.
[32]. Xu, N., Li, X., Yuan, Q., & Chan, K. C. (2014). Excess perks and stock price crash risk: Evidence from China. Journal of Corporate Finance, 25, 419–434.
[33]. Yang, X., Peng, C., & Yao, A. (2018). Management ability, internal control, and corporate sustainable development. Auditing Research, (03), 121–128.
[34]. Zhang, X., & Chi, G. (2019). Internal control and institutional investor herding behavior: "Reverse" governance effects and heterogeneity analysis. Finance and Trade Research, 30(1), 99–110.
[35]. Yin, H., & Nan, Z. (2024). Investor sentiment mining based on deep learning and its impact on stock price crash risk. Journal of Central University of Finance & Economics, (03), 36–56.
[36]. Li, M., Li, W., Wang, F., Jia, X., & Rui, G. (2020). Applying BERT to analyze investor sentiment in stock market. Neural Computing and Applications, 33(10), 4663–4676.
[37]. Roumeliotis, K. I., Tselikas, N. D., & Nasiopoulos, D. K. (2024). LLMs and NLP Models in Cryptocurrency Sentiment Analysis: A Comparative Classification Study. Big Data and Cognitive Computing, 8(6), 63. https://doi.org/10.3390/bdcc8060063.
Cite this article
Liu,R.;Li,R. (2025). Investor sentiment and stock price crash risk: internal control as a mediator in Chinese markets. Journal of Applied Economics and Policy Studies,18(2),52-60.
Data availability
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.
Disclaimer/Publisher's Note
The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of EWA Publishing and/or the editor(s). EWA Publishing and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content.
About volume
Journal：Journal of Applied Economics and Policy Studies
© 2024 by the author(s). Licensee EWA Publishing, Oxford, UK. This article is an open access article distributed under the terms and
conditions of the Creative Commons Attribution (CC BY) license. Authors who
publish this series agree to the following terms:
1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons
Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this
series.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published
version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial
publication in this series.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and
during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See
Open access policy for details).