Strategic deviation and idiosyncratic return volatility

Abstract

This study examines the relationship between strategic deviation and idiosyncratic return volatility (IRV). Using a large sample of U.S. public firms, we find that firms that strategically deviate from industry peers are related to higher IRV. This relationship is weaker for firms with transparent information environments and better corporate governance. Robustness tests show that our results are not affected by endogeneity problems. Additional analyses reveal that strategically deviant firms are associated with higher earnings volatility and cash flow volatility. Taken together, we reveal that strategic deviation has important implications for firms’ risk.