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Disentangling the impacts of industrial and global diversification on firm risk

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  • Jafarinejad, Mohammad
  • Ngo, Thanh
  • Escobari, Diego

Abstract

We examine the impact of corporate diversification on firm risk exposure from 1998 to 2016. We find that both global and industrial diversification mitigate idiosyncratic and world market risk while having a negligible impact on U.S. market risk, but the effects vary before, during, and after the financial crisis of 2007–2009. Before the crisis, only global diversification mitigates idiosyncratic risk, but it increases firms' exposure to world market risk. During the crisis, industrial diversification increases idiosyncratic risk, but both types of diversification increase exposure to U.S. market risk. After the crisis, both types of diversification increase firms' exposure to U.S. market risk but have negligible impact on idiosyncratic and world market risk. Our findings remain robust after we control for the potential endogeneity of the diversification decision through various self-selection models.

Suggested Citation

  • Jafarinejad, Mohammad & Ngo, Thanh & Escobari, Diego, 2018. "Disentangling the impacts of industrial and global diversification on firm risk," Global Finance Journal, Elsevier, vol. 37(C), pages 39-56.
    • Handle: RePEc:eee:glofin:v:37:y:2018:i:c:p:39-56
    DOI: 10.1016/j.gfj.2018.04.006
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    More about this item

    Keywords

    Financial crisis; Global diversification; Industrial diversification; Idiosyncratic risk; Systematic risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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