Impacts of Company Diversification Strategy on Crash Risk of Stock Price with Emphasis on Agency Costs

Abstract

This study examines the impacts of company diversification strategy on crash risk of stock price with emphasis on agency costs in the companies listed in the Tehran Stock Exchange, TSE. To proceed with research objectives, 120 companies in the TSE were selected for the period 2009-2014. To measure diversification strategy, Herfindahl index and entropy index were used, and to measure crash risk of stock price, negative conditional skewness of firm-specific monthly returns and down-to-up volatility measure were used. Panel data method was applied to the tests of hypotheses. The results showed that company's diversification strategy has positive and significant effects on crash risk of stock price. Also, after dividing the companies into two groups of companies with high and low agency costs, the impact of the company diversification strategy on crash risk of stock price were examined distinctly. The results showed that the positive impact of company's diversification strategy on crash risk of stock price in companies with high agency costs is intensive.

Keywords

• corporate diversification strategy
• crash risk of stock price
• agency costs