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
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: Suggested Citation