Corporate diversification strategies and bankruptcy risk: A re-examination based on COVID-19

Dezhu Ye, Wenjun Ji and Nan Sun

Journal of Asian Economics, 2025, vol. 99, issue C

Abstract: Current research has not yet reached a consensus on the relationship between corporate diversification strategies and risk, in part because of the difficulty in addressing the potential endogeneity of diversification strategies and the fact that the manifestation of risk becomes more pronounced only under strong exogenous adverse shocks. The outbreak of COVID-19 provides a unique opportunity to re-examine the relationship between corporate diversification strategies and risk. We find that the outbreak of COVID-19 significantly increases the bankruptcy risk of firms employing diversification strategies. The further test reveals that the increased overall cash flow volatility, and financing constraints resulting from reduced bank and trade credit are the primary mechanisms behind this effect. However, heterogeneity tests indicate that the adverse impact of COVID-19 on the bankruptcy risk of diversified strategic firms is significantly mitigated when the firms are state-owned, have affiliations with customers or suppliers, hold shares in commercial banks, or maintain a high level of information disclosure quality. Our findings contribute to a deeper understanding of the potential vulnerability of diversification strategies when faced with significant adverse shocks.

Keywords: Corporate diversification strategies; Bankruptcy risk; COVID-19; Cash flow volatility; Financing constraints (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 M21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:99:y:2025:i:c:s1049007825000788

DOI: 10.1016/j.asieco.2025.101954

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