Crisis sentiment and banks’ stock price crash risk: A missing piece of the puzzle?

• Published in: Journal of international financial markets, institutions & money institutions & money, 2023-09, Vol.87, p.101806, Article 101806
• Main Authors: Tzomakas, Christos, Anastasiou, Dimitrios, Katsafados, Apostolos, Krokida, Styliani Iris
• Format: Article
• Language: English
• Subjects: Crisis sentiment; Panel VAR; Stock price crash risk; Textual analysis
• ISSN: 1042-4431
• DOI: 10.1016/j.intfin.2023.101806

•Employing a PVAR methodology we investigate the impact of crisis sentiment on European banks’ stock price crash risk.•We examine three different crisis sentiment aspects.•Our results reveal a positive and significant relationship between crisis sentiment and stock price crash risk.•We argue that crisis sentiment is an important missing piece of the puzzle as investors do not only rely on fundamentals but also on their own perception of risk. This study empirically examines whether the stock price crash risk of euro area banks is affected by crisis sentiment during the period 2004–2020. We introduce a diverse set of crisis sentiment aspects, including communication and investors’ focus of attention to market wide sentiment. We employ quarter-bank level data and various measures for stock price crash risk and crisis sentiment, including text and Google-search based to market-based proxies. Our results reveal a positive and significant relationship between crisis sentiment and stock price crash risk, implying that higher crisis sentiment leads to a higher future stock price crash risk for the euro area banks. These findings highlight the importance of crisis sentiment as the “transmission mechanism” of stock price crash risk and have important policy implications for central bankers and regulators.