Study On The Analyst Optimism And Individual Stock Price Crash

Individual stock price crash is a phenomenon that the stock price collapses suddenly and sharply without a warning. The crash is an unusual phenomenon that widely exists in the market. If a stock price crashes, investors’ wealth will be decreased and the market efficiency will be lowered. What’s more, a large number of stock price crashes may hinder the normal development of the real economy. A main reason for stock price crash is the theory of information asymmetry. The stock market in China has a short history and the regulatory system is not perfect, which means the information asymmetry is severer in the market of China.As an important agent to transfer information, analysts usually collect information and analyze the fundamental situations about the listing company. They are supposed to alleviate the information asymmetry. In fact, being restricted by personal ability and external system environment, there’s always a tendency that analysts overvalue the earnings of the company, which is analyst optimism. An optimistic bias will prevent the spread of negative information to investors. Investors will make wrong valuation about the company and the price will be influenced. Once the stock is wrongly priced and deviates from the real value seriously, there will be a price bubble. As the negative information accumulates and reaches the limit, negative information will eventually come to the market. The bubble bursts and the individual stock price crash occurs.Based on the theory of information asymmetry, this paper mainly focuses on the relation between analyst optimism and individual stock price crash, and whether the market condition and personal reputation will influence the relation. An empirical research is conducted with the companies samples selected from the Shanghai and Shenzhen A share market from 2007 to 2013, and the sample only includes the companies that are followed by analysts. Several conclusions are made:(1)Analysts optimistic bias is positively related to the future price crash;(2)In the bull market, the positive relation between the analysts optimism and price crash is stronger, while in the bear market, the positive relation is weaker;(3)When forecasting the earnings about a company, analysts will take personal reputation into consideration. Analysts with good reputation will do the forecast with lower optimistic bias. And the positive effect of optimistic bias on stock price crash will be weaker. This paper gives a reasonable explanation of individual stock price crash, and helps investors gain a comprehensive understanding of analysts.