Abstract
This study examines the impact of the corporate diversification strategy on the stock price crash risk. Using a large sample of Chinese A-share listed companies for the period 2003-2017, we find the stock price crash risk significantly increases when the operation strategy of a firm changes from a specialized operation to a diversified operation or the degree of diversified operations deepens. We also find that our results are stronger for non-state-owned listed firms, but not significant for state-owned firms. Furthermore, we find that the significant positive association between diversification and crash risk is more pronounced for firms with low external audit quality and low analyst coverage. Our study suggests that the diversification of operating strategy matter in determine stock price crash risk.
Highlights
As one of the most important financial markets in the world, Chinese stock market experiences dramatic growth, showing great research value for both domestic and international scholars
Our results suggest that diversification strategy increases Chinese listed company's stock price crash risk
We find that stock price crash risk is significant increased when companies change from specialized operations to diversified operations or the degree of diversified operations increases
Summary
As one of the most important financial markets in the world, Chinese stock market experiences dramatic growth, showing great research value for both domestic and international scholars. Preventing the crash of stock prices and guaranteeing the steady of the capital market have become a significant issue when the strong supervision of financial risk becomes a consensus. In the most recent years, many well-known listed companies suffered stock price crashes. We observed that most of those suffering the stock price collapse are diversified companies, and even some of them are the more successful early diversified companies. The main purpose of this paper is to investigate two questions below: Have the stock prices of these companies plummeted due to diversification? What impact does diversification have on the stock price crash risk? The main purpose of this paper is to investigate two questions below: Have the stock prices of these companies plummeted due to diversification? What impact does diversification have on the stock price crash risk?
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