JACIII Vol.27 No.5 pp. 866-875
doi: 10.20965/jaciii.2023.p0866

Research Paper:

Environmental Uncertainty and Idiosyncratic Risk: The Dual Role of Diversification Strategy

Fengtao Hua*, Rui Tang**, and Xin Leng*

*School of Economics and Management, Anhui Normal University
No.189 Jiuhua South Road, Yijiang District, Anhui 241002, China

**School of College of Business Administration, Huaqiao University
No.269 Chenghua North Road, Fengze District, Quanzhou, Fujian 362021, China

March 30, 2023
May 10, 2023
September 20, 2023
environmental uncertainty, idiosyncratic risk, diversification informativeness, cash flow

In response to escalating environmental uncertainty, corporate executives typically adjust their business strategy between diversification and refocusing. This study examines the effect of environmental uncertainty on idiosyncratic risk, as well as the moderating impact of diversification on this relationship. Utilizing a sample of companies listed on the Chinese stock market from 2005 to 2019, the results suggest that a significant positive correlation exists between uncertainty and idiosyncratic risk. As environmental uncertainty escalates, corporate managers increasingly opt for diversification before eventually refocusing their business strategy. Furthermore, while moderate diversification can mitigate the impact of uncertainty on idiosyncratic risk, excessive diversification intensifies this correlation. This research holds considerable significance for understanding the influence mechanism of idiosyncratic risk and ensuring the stability of the capital market.

Cite this article as:
F. Hua, R. Tang, and X. Leng, “Environmental Uncertainty and Idiosyncratic Risk: The Dual Role of Diversification Strategy,” J. Adv. Comput. Intell. Intell. Inform., Vol.27 No.5, pp. 866-875, 2023.
Data files:
  1. [1] J. Y. Campbell et al., “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk,” The J. of Finance, Vol.56, No.1, pp. 1-43, 2001.
  2. [2] A. Ang et al., “High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence,” J. of Financial Economics, Vol.91, No.1, pp. 1-23, 2009.
  3. [3] G. Brown and N. Kapadia, “Firm-Specific Risk and Equity Market Development,” J. of Financial Economics, Vol.84, No.2, pp. 358-388, 2007.
  4. [4] Y. Xu and B. Malkiel, “Investigating the Behavior of Idiosyncratic Volatility,” The J. of Business, Vol.76, No.4, pp. 613-645, 2003.
  5. [5] F. Hua, “How Does Institutional Investors Affect Corporate Idiosyncratic Risk: Stimulatory or Inhibitory Role? Experimental Evidence Based on Path Analysis,” J. of Shanghai University of Finance and Economics, Vol.20, No.1, pp. 43-56+101, 2018 (in Chinese).
  6. [6] F.-T. Hua, “Corporate Idiosyncratic Risk, Information Disclosure Quality and Earnings Management—The Empirical Analysis Based on A-Share Listed Companies,” J. of Shanxi University of Finance and Economics, Vol.38, No.3, pp. 79-89, 2016 (in Chinese).
  7. [7] F. Hua, “Real Earnings Management, Information Quality and Environment Uncertainty: Based on Empirical Evidence from A-Shares of SSE,” China Economic Studies, Vol.2017, No.3, pp. 123-135, 2017 (in Chinese).
  8. [8] X. Zhang, “Income Smoothing, Idiosyncratic Risk & CEO Turnover,” J. of Mathematical Finance, Vol.6, No.1, pp. 1-13, 2016.
  9. [9] H. Wu, X. Yang, and H. Wei, “Product Market Competition and Firm’s Stock Idiosyncratic Risk—Based on the Empirical Evidence of Chinese Listed Companies,” Economic Research J., Vol.2012, No.6, pp. 101-115, 2012 (in Chinese).
  10. [10] F. Hua and F. Xu, “How Does Environmental Uncertainty Affect Firm Idiosyncratic Risk: A Study Based on Mediating Effect of Cash Flow Flotation and Information Quality,” Nankai Business Review, Vol.21, No.4, pp. 122-133, 2018 (in Chinese).
  11. [11] Y. Zhang, X. Li, and J. Xu, “Agency Problem, Ownership Structure and Company Diversification,” Economic Science, Vol.2005, No.3, pp. 90-99, 2005 (in Chinese).
  12. [12] J. M. Campa and S. Kedia, “Explaining the Diversification Discount,” The J. of Finance, Vol.57, No.4, pp. 1731-1762, 2002.
  13. [13] D. J. Denis, D. K. Denis, and A. Sarin, “Agency Problems, Equity Ownership, and Corporate Diversification,” The J. of Finance, Vol.52, No.1, pp. 135-160, 1997.
  14. [14] K. Lins and H. Servaes, “International Evidence on the Value of Corporate Diversification,” The J. of Finance, Vol.54, No.6, pp. 2215-2239, 1999.
  15. [15] G. de la Fuente and P. Velasco, “Capital Structure and Corporate Diversification: Is Debt a Panacea for the Diversification Discount?” J. of Banking & Finance, Vol.111, Article No.105728, 2020.
  16. [16] M. Wang and X. Chen, “Ultimate Controller, Diversification and Stock Price Crash Risk,” J. of Shanxi University of Finance and Economics, Vol.38, No.9, pp. 88-100, 2016 (in Chinese).
  17. [17] Professional Adaptation, “Diversification, Capital Structure, and Systematic Risk: An Empirical Investigation,” J. of Accounting, Auditing & Finance, Vol.3, No.1, pp. 44-48, 1988.
  18. [18] S. Pondeville, V. Swaen, and Y. De Rongé, “Environmental Management Control Systems: The Role of Contextual and Strategic Factor,” Management Accounting Research, Vol.24, No.4, pp. 317-332, 2013.
  19. [19] H. Shen, L. Wu, and Z. Xiao, “Environmental Uncertainty and Audit Opinion: Based on Equity Structure,” Accounting Research, Vol.2010, No.12, pp. 57-64, 2010 (in Chinese).
  20. [20] S. Yang, “Fair Value Hierarchical Measurement, Environmental Uncertainty and Audit Quality,” Auditing Research, Vol.2018, No.2, pp. 104-112, 2018 (in Chinese).
  21. [21] D. Ghosh and L. Olsen, “Environmental Uncertainty and Managers’ Use of Discretionary Accruals,” Accounting, Organizations and Society, Vol.34, No.2, pp. 188-205, 2009.
  22. [22] W. Y. Oi, “The Desirability of Price Instability Under Perfect Competition,” Econometrica, Vol.29, No.1, pp. 58-64, 1961.
  23. [23] H.-J. Sheu and S.-Y. Lee, “Excess Cash Holdings and Investment: The Moderating Roles of Financial Constraints and Managerial Entrenchment,” Accounting & Finance, Vol.52, No.s1, pp. 287-310, 2012.
  24. [24] G. G. Dess and D. W. Beard, “Dimensions of Organizational Task Environments,” Administrative Science Quarterly, Vol.29, No.1, pp. 52-73, 1984.
  25. [25] V. A. Aivazian, M. M. Rahaman, and S. Zhou, “Does Corporate Diversification Provide Insurance Against Economic Disruptions?,” J. of Business Research, Vol.100, pp. 218-233, 2019.
  26. [26] V. Subramaniam et al., “Firm Structure and Corporate Cash Holdings,” J. of Corporate Finance, Vol.17, No.3, pp. 759-773, 2011.
  27. [27] B. Trueman and S. Titman, “An Explanation for Accounting Income Smoothing,” J. of Accounting Research, Vol.26, pp. 127-139, 1988.
  28. [28] Z. Lin, J. Zheng, and J. Bu, “Environmental Uncertainty, Diversification and Capital Cost,” Accounting Research, Vol.2015, No.2, pp. 36-43+93, 2015 (in Chinese).
  29. [29] C. A. Montgomery and H. Singh, “Diversification Strategy and Systematic Risk,” Strategic Management J., Vol.5, No.2, pp. 181-191, 1984.
  30. [30] H. Fang and Z. Chen, “Can High Quality Internal Control Effectively Respond to Idiosyncratic Risk and Systematic Risk?,” Accounting Research, Vol.2015, No.4, pp. 70-77+96, 2015 (in Chinese).
  31. [31] M. A. Ferreira and P. A. Laux, “Corporate Governance, Idiosyncratic Risk, and Information Flow,” The J. of Finance, Vol.62, No.2, pp. 951-989, 2007.

*This site is desgined based on HTML5 and CSS3 for modern browsers, e.g. Chrome, Firefox, Safari, Edge, Opera.

Last updated on Sep. 29, 2023