Document Type

Article

Version Deposited

Published Version

Publication Date

5-2015

Publication Title

The International Journal of Business and Finance Research

Abstract

We 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.

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With this email, we grant Campbell Library, Rowan University permission to permanently add articles published by its faculty members in any of the Institute for Business and Finance Research journals to institutional repository, Rowan Digital Works, only and for non-profit use only. Deposit of such work must occur after publication with full citation.

Published Citation

Folkinshteyn, D., Meric, G., & Meric, I. (2015). Investor reaction in stock market crashes and post-crash market reversals. International Journal of Business and Finance Research, 9(5), 57-70.

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