Diversification Strategy and Stock Price Crash Risk：Evidence from China

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.

Corporate diversification and crash risk: Evidence in East Asian firms

“…First, the study extends Claessens et al (1998), Claessens et al (1999), and Lins and Servaes (2002) by investigating the influence of diversification on crash risk in addition to its impact on firm performance in East Asian countries. Second, it corroborates the evidence regarding the relationship between diversification and crash risk, which contradicts prior studies focusing on Malaysia (Lee et al, 2019), China (Qi & Diao, 2020), and the U.S. (Wang et al, 2023). Third, it utilizes a more extensive data set of six East Asian countries to examine the relationship between diversification and crash risk.…”

“…We have calculated the first measure, the negative skewness coefficient (NCSKEW), with Equation ( 3), where 𝑛𝑛 is the number of firm-specific weekly abnormal returns (𝑤𝑤 𝑖𝑖,𝑡𝑡 ) in a fiscal year (J. Chen et al, 2001;Qi & Diao, 2020).…”

“…This measure separates "down" weeks from "up" weeks, where a down (up) week is the firmspecific abnormal weekly return lower (higher) than the annual average weekly return in fiscal year 𝑡𝑡; hence, 𝑛𝑛 𝑑𝑑 is the number of down weeks and 𝑛𝑛 𝑢𝑢 Is the number of up weeks (J. Chen et al, 2001;Qi & Diao, 2020).…”

“…Meanwhile, the crash risk literature offers an alternative performance measure that reflects agency problems (Jin & Myers, 2006). However, only a few studies have examined the relationship between diversification and crash risk, which also have provided mixed conclusions (Lee et al, 2019;Qi & Diao, 2020;Wang et al, 2023). Environmental heterogeneity across the country exacerbates bad newshoarding behavior, such as less developed financial and poor corporate governance systems, and positively affects crash risk (Jin & Myers, 2006).…”

“…Third, it utilizes a more extensive data set of six East Asian countries to examine the relationship between diversification and crash risk. And finally, in addition to prior studies (Lee et al, 2019;Qi & Diao, 2020;Wang et al, 2023), it explores an alternative hypothesis and mechanisms explaining a relationship that is more suitable for the context of East Asian countries.…”