Abstract
Business strategies play a vital role in a firm’s success but, if not properly executed, can lead to financial irregularities and mispricing, influencing the firm’s performance and leading to stock price crash risk. The present study examines the impact of firm’s business strategy and market power on stock price crash risk. Following Miles and Snow’s (2003) model, we classified Chinese firms listed on the Shenzhen and Shanghai stock exchanges into defenders (conservative) and prospectors’ (aggressive) business strategies over a period of 2006–2019. We employed industry and year fixed effects regression to show that prospectors who follow aggressive strategies are more prone to stock price crash risk than defenders who follow conservative strategies. Additionally, we show that firms with high market power also contribute to increased stock price crash risk. Our results are also robust to alternative control variables and different statistical models like the two-stage least squares method.
Highlights
Unlike previous research studies (e.g., Callen and Fang 2015; Choi and Jung 2020; Moradi et al 2021; Yu and Mai 2020) that are mainly focused on market-level determinants of crash risk, in this study, we examined how prospectors and defenders’ business strategies affect stock price crash risk
Stock price crash risk is an important factor to understand before making an investment decision and managing risks
Studies have ignored the firm-level business strategy that leads to these factors and influences crash risk
Summary
The competition among firms has increased significantly due to the rise in the globalization of economies.In this globally competitive environment, firms can no longer remain competitive by merely employing low-cost labor and instead must use innovative business strategies to improve their product, supply chain, procedure, and overall firm management.The global business environment and market trends create new challenges for firms in mapping innovative business strategies to achieve rapid growth.the firm’s business strategy impacts its investment decision and overall organizational performance (Croteau and Bergeron 2001; Navissi et al 2017).Firms adopting innovative solutions to achieve rapid growth enhance the chances of irregularities and misinformation; this can lead to poor transparency and opaque financial reporting, which is one of the major causes of stock price crash risk (hereafter, crash risk) (Habib and Monzur 2017).The primary concern for the firm is the risk associated with these business strategies. The competition among firms has increased significantly due to the rise in the globalization of economies. In this globally competitive environment, firms can no longer remain competitive by merely employing low-cost labor and instead must use innovative business strategies to improve their product, supply chain, procedure, and overall firm management. The global business environment and market trends create new challenges for firms in mapping innovative business strategies to achieve rapid growth. Firms adopting innovative solutions to achieve rapid growth enhance the chances of irregularities and misinformation; this can lead to poor transparency and opaque financial reporting, which is one of the major causes of stock price crash risk (hereafter, crash risk) (Habib and Monzur 2017).
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