Corporate Diversification And Stock Price Crash Risk

Prior studies have documented the effect of corporate diversification on firm performance,cost of capital,corporate policies,firm risk and real business activities.This study takes a departure from the prior studies by investigating further whether corporate diversification affects the risk that diversified firms stock prices would crash.If diversified firms embrace high quality financial reporting and engage less in withholding unfavorable news from the market,they would be related to lower future crash risk.But,if managers use diversification to conceal unfavorable news,and to distract stockholder attention,corporate diversification would be related to higher future crash risk.The findings suggest that corporate diversification has a risk-moderating effect on crash risk.Specifically,there is a significant negative relationship between firms' diversification strategy and one year ahead crash risk,after accounting for other determining factors of stock price crash risk recognized in previous studies.These results confirm the study's earlier estimation and this has been robust after I accounted for potential endogeneity.Additionally,a cross-sectional analysis reveals that the mitigating effect of corporate diversification on future stock price crash risk is more pronounced for corporations with weak corporate governance or low institutional investors.This finding is consistent with the work of Kim et al.(2014)who show that strong corporate governance and high levels of institutional investors are negatively related to crash risk.Overall,this study gives implications of corporate diversification for future extreme negative stock returns and should be of interest to investors as well as other stakeholders who are concerned about a firm's viability.