Investor sentiment and stock price crash risk: internal control as a mediator in Chinese markets

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.