استراتژی کسب و کار، سهام بیش ارزش گذارى شده و خطر سقوط قیمت سهام Business strategy, overvalued equities, and stock price crash risk

1. Introduction This paper investigates whether firm-level business strategies affectfuture stock price crash risk. We also testfor whether equity overvaluation moderates the association between the two. By exploring the extentto 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 and thus help investors in allocating funds to less risky businesses. Interest in investors’ perceptions of crash risk has been increasing, particularly since the 2008 financial crisis. In the advent of the crisis, investors’ lack of confidence and fear of further decreases (crash risk) in prices have been identified among the various culprits behind the dramatic price declines. Thus, understanding what affects investors’ perceived crash risk warrants our research. Crash risk is a vital elementin stock returns to investors because, unlike risks emanating fromsystematic volatilities, it cannot be diversified away (Sunder, 2010). The extantliterature on the underlying reason for crash risk is dominated by the ‘bad news hoarding’theory, which argues that managerial incentives for withholding bad news for an extended period increases the probability of crash risk. When the accumulation of bad news passes a threshold, it is revealed to the market at once, leading to a large negative drop in price for the stock (Jin and Myers, 2006).1 Certain firm-specific characteristics has been examined as increasing crash risk, including opaque financial reporting proxied by accruals and real earnings management (Hutton et al., 2009; Francis et al., 2016); corporate tax avoidance propensity (Kim et al., 2011a), and CEO/CFO equity incentives (Kim et al., 2011b).2 Interestingly, recent studies (e.g., Bentley et al., 2013; Higgins et al., 2015) show that all of these are determined to a certain extent by the unique business strategies pursued by firms (an antecedent)3 that remain relatively stable over time (Hambrick, 1983; Snow and Hambrick, 1980). This motivates us to argue that business strategy of the firm has potential to have first order impact on crash risk, a direct economic consequence for investors.