The Impact of Corporate Diversification Strategy on the Downside Risk of Stock Prices

Sooeun KIM

doi:10.56201/ijefm.v10.no7.2025.pg1.13

📄 Download Paper

The Impact of Corporate Diversification Strategy on the Downside Risk of Stock Prices

Sooeun KIM

Abstract

This study examines the impact of corporate diversification strategies on the downside risk of stock prices for companies listed on the Korea Exchange (KRX) securities market between 2012 and 2023. The key findings of the study are as follows: First, companies that adopt diversification strategies benefit from diverse revenue streams and portfolio risk dispersion, ultimately leading to reduced overall risk. This highlights the importance of pursuing both related and unrelated diversification. Future research could further explore which type of diversification, i.e., related or unrelated, exposes firms more significantly to stock price downside risk. Second, while companies can ultimately lower their overall risk by diversifying their revenue streams and investment portfolio, for companies with high growth potential, prioritizing revenue expansion over cash retention, in combination with diversification strategies, can lead to greater income growth and further reductions in risk. Third, while companies can ultimately lower their overall risk by diversifying their revenue streams and investment portfolio, firms with high major shareholder ownership ratios are more interested in increasing stock value by generating revenue through sales growth rather than holding cash, and by pursuing diversification, the effects of increased revenue and risk reduction become even more pronounced.

Keywords

DiversificationDownside RiskSales GrowthMajor Shareholder Ownership

References

An, H., & Zhang, T. (2013). Stock price synchronicity, crash risk, and institutional investors. Journal of Corporate Finance, 21(1), 1-15. Berry, C. H. (1971). Corporate growth and diversification. The Journal of Law and Economics, 14(2), 371-383. Black, F. (1976). Studies of stock market volatility changes, proceedings of the american statistical association. Business and Economic Statistics Section, 177-181. Boubaker, S., Mansali, H., & Rjiba, H. (2014). Large controlling shareholders and stock price synchronicity. Journal of Banking and Finance, 40(4), 80-96. Callen, J. L., & Fang, X. (2015). Short interest and stock price crash risk. Journal of Banking and Finance, 60(c), 181-194. Chen, J., Hong, H., & Stein, J. C. (2001). Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61(3), 345- 381. Claessens, S., & Fan, J. P. H. (2002). Corporate governance in asia: a survey. International Review of Finance, 3(2), 71-103. Gao, W., Li, Q., & Drougas, A. (2017). Ownership structure and stock price crash risk: evidence from china. Journal of Applied Business and Economics, 19(4), 65-78. Hann, R. N., Ogneva, M., & Ozbas, O. (2013). Corporate diversification and the cost of capital. The Journal of Finance, 68(5), 1961-1999. Hund, J., Monk, D., & Tice, S. (2010), Uncertainty about average profitability and the diversification discount. Journal of Financial Economics, 96(3), 463-484. Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, r2 , and crash risk. Journal of Financial Economics, 94(1), 67-86. Jin, L., & Myers, S. C. (2006). R2 around the world: new theory and new tests. Journal of Financial Economics, 79(2), 257-292. Lee, B. S., & Li, M. Y. L. (2012). Diversification and risk-adjusted performance: a quantile regression approach. Journal of Banking and Finance, 36(7), 2157-2173. Li, Y., & Zeng, Y. (2019). The impact of top executive gender on asset prices: evidence from stock price crash risk. Journal of Corporate Finance, 58, 528-550. Mammen, J., Alessandri, T. M., & Weiss, M. (2021). The risk implications of diversification: integrating the effects of product and geographic diversification. Long Range Planning, 54(1), 101-142. Onali, E., & Mascia, D. V. (2022). Corporate diversification and stock risk: evidence from a global shock. Journal of Corporate Finance, 72, 102-150.

The Impact of Corporate Diversification Strategy on the Downside Risk of Stock Prices

Abstract

Keywords

References

More Articles from INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL MANAGEMENT