Pandemic Risk and Diversification

Abstract

We investigate the impact of information disclosed under SFAS 131 on idiosyncratic and total stock risk. For identification, we exploit an exogenous shock on volatility expectations. We are the first to show that international diversification alleviates the post-shock increase in idiosyncratic, total stock volatility and total skewness. Business diversification exacerbates the impact of the shock on idiosyncratic and total volatility, while it reduces that on idiosyncratic and total skewness. We also provide evidence that international diversification decreases the negative price reaction to stock market crashes following the shock.