Corporate diversification and crash risk: Evidence in East Asian firms

Abstract

This study examines the impact of corporate diversification on crash risk in East Asian firms. We selected East Asian firms as the research sample due to unique features that might facilitate agency problems there, such as lower investor protection, more concentrated ownership among firms, and less developed institutional contexts in emerging economies. This study proposes two competing effects explaining the mechanisms of how diversification exacerbates or mitigates crash risk among East Asian firms: information complexity and diversification capacity effects. This study employs a pooled ordinary least-square (OLS) regression on a sample of publicly listed firms in six East Asian countries from 2014 to 2019. Consistent with the diversification capacity effect, our results show that diversification mitigates crash risk among East Asian firms.