Abstract: Stock price surge intuitively generates higher profits and promotes the positive sentiment in the short run.Why it is regarded as risk? Prior literature has already done much researches on crash risk. However, there are few studies discussing the stock price surge.The features of stocks are analyzed with price surge, the future performance of these stocks is examined, and the empirical evidence on the potential risk of stock price surge is provided. A comprehensive database on Chinese stock market from 2006 to 2016 is used and the number of the trading days is counted that reached the positive price limit within a given period as a proxy for the intensity of price surge. To show potential risks behind the price surge, three outcome variables, i.e. the number of trading days that reached the negative price limit, the future cumulative abnormal returns (CAR) and stock return volatility, are introduced as risk measures.The data is compiled from CSMAR and WIND database.
Our findings show that:(1)stocks with more price surges are associated with lower return on asset, higher market-to-book ratio, less institutional ownership, and less likelihood of being HS300-index stock; (2) these stocks exhibit lower long-runexcess returns, more stock price crashes and higher volatility in the future. Moreover, the cross-sectional heterogeneity across stocks is also explored in the risks hidden behind price surge. The interaction analyses find that the down-side risks turn to be significantly higher for firms with worse operation fundamentals, over-optimistic market sentiment, higher information asymmetry and worse corporate governance. These results are quite robust to alternative proxies for future performance and alternative model specifications. Our results suggest that the stock price surge is indeed a kind of risk because it results in severer future loss and higher uncertainty.This paperempirically illuminates the risk hidden behind price surge and add to the prior literatures discussing the extreme price risk.

Key words: price surge, risk, future loss, market manipulation, over-optimistic