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

The effect of idiosyncratic risk on firm decisions: under‐investment or diversification? 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

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

Loading next page...
 
/lp/emerald-publishing/the-effect-of-idiosyncratic-risk-on-firm-decisions-under-investment-or-wSCnT4EkAC
Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/CFRI-05-2013-0048
Publisher site
See Article on Publisher Site

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.

Journal

China Finance Review InternationalEmerald Publishing

Published: Aug 12, 2014

Keywords: Investment; Managerial ownership; Idiosyncratic risk; China's stock market; Industrial diversification

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off