Business Strategy, Overvalued Equities, and Stock Price Crash Risk

Rtesearch in International Business and Finance 39 (Part A), 389–405

Posted: 6 Sep 2014 Last revised: 8 Mar 2017

See all articles by Ahsan Habib

Ahsan Habib

Massey University - School of Accountancy; Massey University

Mostafa Monzur Hasan

Macquarie University

Date Written: November 20, 2016

Abstract

This paper examines empirically the effect of firm-level business strategies on future stock price crash risk and the extent to which equity overvaluation moderates this relation. By exploring the extent to which firms following particular business strategies are more or less likely to experience crash risk, we provide evidence that increases our understanding of the underlying determinants of crash risk. Using a composite strategy score developed by Bentley, Omer and Sharp (2013) and applying two variants of crash risk, we document that firms following innovative business strategies (prospectors) are more prone to future crash risk than defenders. We extend our analysis by examining the moderating role of equity overvaluation and find that prospectors are more prone to equity overvaluation which increases future crash risk.

Keywords: Business strategies; stock price crash risk; equity overvaluation; investor sentiment

JEL Classification: G02, G14, G30, M10

Suggested Citation

Habib, Ahsan and Hasan, Mostafa Monzur, Business Strategy, Overvalued Equities, and Stock Price Crash Risk (November 20, 2016). Rtesearch in International Business and Finance 39 (Part A), 389–405, Available at SSRN: https://ssrn.com/abstract=2492179 or http://dx.doi.org/10.2139/ssrn.2492179

Ahsan Habib (Contact Author)

Massey University - School of Accountancy ( email )

Auckland
New Zealand

Massey University ( email )

Auckland
New Zealand

Mostafa Monzur Hasan

Macquarie University ( email )

Level 3, Building 4ER,
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/mostafa-hasan

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