Do Investors Underestimate the Risk of Asset Bubbles? ——Evidence from the Goodwill Bubbles of Chinese Listed Companies

We investigate the extent of investors’ awareness of the bubble risk of assets’ fundamental value by examining Chinese listed companies’ goodwill bubbles. We find that firms with larger goodwill have a higher possibility of goodwill impairment recognition in the future, indicating a higher bubble risk of companies’ assets fundamental. Next, we find that firms with more goodwill experience lower stock returns in subsequent 1–3 years, which means investors do not demand corresponding risk compensation and underestimate the goodwill bubble risk for these firms. Furthermore, we investigate five behavioral biases driving investors to underestimate the bubble risk. The results show that investors’ gambling preference for bubble assets is the key driver, while investors limited attention, extrapolation, opinion divergence, and earnings expectation are not applicable in our setting. Our study suggests that investors’ gambling preference is a channel through which the risk of companies’ assets fundamental bubble transmits to the stock market.