Association between International Diversification Strategy and Future Stock Price Crash Risk

Abstract

This paper tests whether the corporate global diversification lessens the information asymmetry between the firm and the investors and thus associated with a negative future stock price crash risk in Korean stock market. As the increased integration of global economies, an increasing number of firms have pursued global diversification over time. However, less attention has been given to the economic consequences or benefits in equity market from global diversification. Using a large sample of firms listed in KOSPI over 2000-2017, this paper finds that the degree of corporate globalization is less likely to experience firm-specific future stock price crashes. The results are consistently robust across alternative measures of globalization and crash risk. Moreover, the additional finding shows that the negative association between globalization and future crashes is pronounced when the firms are not followed by analysts. And discounts for global firms significantly decrease in economic downturns, suggesting an incremental hedging benefit of diversification. These findings are robust when the estimates account for the endogeneity of globalization. Overall, the empirical findings suggest that corporate diversification may create an business and information environment that partly mitigates the managerial opportunistic motives to withhold bad news, supporting positive effect of global diversification.