Technological Diversification and Resilience to Systematic Risk: Evidence from Listed Firms in China

46 Pages Posted: 28 Aug 2024

See all articles by Jiaying MO

Jiaying MO

Zhejiang University of Science and Technology

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

Zhao Rong

Wenlan School of Business, Zhongnan University of Economics and Law

Li Yu

University of Manitoba

Abstract

This paper investigates whether a firm with diversified technological bases is more resilient to systematic downside risk. By investigating Chinese listed manufacturing firms for 2015-2020, we find that diversified technological bases significantly reduce the left-tail correlation between a firm's stock return and market returns, suggesting that the more diversified the technology bases, the less likely systematic risk would negatively influence a firm's stock price. Compared to firms in traditional industries, the technological diversification effect is more pronounced among firms in high-tech industries. Further analysis suggests that by improving production efficiency and enhancing market power, a firm with a diversified technological base transmits a capacity signal to investors and thus enhances firms’ resilience to systematic risks. By exploiting the 2018 U.S. tariff increase as a negative exogenous shock, we find that exporting firms in targeted industries, relative to those in nontargeted industries, had greater resilience to systematic risks after the shock when their technological bases were more diversified. Overall, this paper confirms the signaling role of technological diversification in the financial market and advances the understanding of firms' ability to resist systematic risks.

Keywords: technological diversification, Systematic risk contagion, Left-tail correlation, China

Suggested Citation

MO, Jiaying and Kong, Dongmin and Rong, Zhao and Yu, Li, Technological Diversification and Resilience to Systematic Risk: Evidence from Listed Firms in China. Available at SSRN: https://ssrn.com/abstract=4939821 or http://dx.doi.org/10.2139/ssrn.4939821

Jiaying MO

Zhejiang University of Science and Technology ( email )

310023
China

Dongmin Kong

School of Economics, Huazhong University of Science and Technology ( email )

Bldg. of Econ. School, Louyu Rd. 1037#
HUST, Hongshan Dist.
Wuhan, Hubei 430074
China

Zhao Rong (Contact Author)

Wenlan School of Business, Zhongnan University of Economics and Law ( email )

Nanhu avenue hi tech development zone wuhan
Wuhan, Hubei 430073
China

Li Yu

University of Manitoba ( email )

501 F.A. Bldg
Winnipeg R3T 5V4, Manitoba R3T 5V5
Canada

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