Technological Diversification and Resilience to Systematic Risk: Evidence from Listed Firms in China
46 Pages Posted: 28 Aug 2024
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
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