IDEAS home Printed from https://ideas.repec.org/a/eme/cfripp/v4y2014i3p271-288.html
   My bibliography  Save this article

The effect of idiosyncratic risk on firm decisions: under-investment or diversification?

Author

Listed:
  • Kebin Deng
  • Haoyan Chen
  • Dongmin Kong

Abstract

Purpose - – The purpose of this paper is to investigate the influence of idiosyncratic risk on firm decisions. Design/methodology/approach - – By introducing managerial ownership as a key variable, the paper presents a parsimonious model to describe the consequences of idiosyncratic risk on firm decisions. Then the paper uses data from the Chinese stock market, in which the managerial ownership is very low (around 0.02 percent) to examine the model predictions. Findings - – The authors find that: first, the negative relation between idiosyncratic risk and firm investment, which is found in prior studies, tends to be insignificant when managerial ownership is very low; second, diversification, as an alternative firm decision to lower risk positively, relates to idiosyncratic risk despite lower managerial ownership; and third, this kind of positive relation is weaker for firms with more managerial incentives when diversification is endogenously modeled. Originality/value - – This paper provides new evidence to complement existing studies from developed markets, in which executives hold substantial stakes.

Suggested Citation

  • Kebin Deng & Haoyan Chen & Dongmin Kong, 2014. "The effect of idiosyncratic risk on firm decisions: under-investment or diversification?," China Finance Review International, Emerald Group Publishing Limited, vol. 4(3), pages 271-288, August.
    • Handle: RePEc:eme:cfripp:v:4:y:2014:i:3:p:271-288
    DOI: 10.1108/CFRI-05-2013-0048
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/CFRI-05-2013-0048/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/CFRI-05-2013-0048/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/CFRI-05-2013-0048?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:cfripp:v:4:y:2014:i:3:p:271-288. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.