Unraveling dynamic interplay between diversification and bankruptcy risk in an emerging market: a GMM-PVAR approach

Thanh Huu Vu and Trung Thanh Ngo ()
Additional contact information
Thanh Huu Vu: Ho Chi Minh City Open University
Trung Thanh Ngo: Ho Chi Minh City Open University

Risk Management, 2025, vol. 27, issue 4, No 7, 33 pages

Abstract: Abstract This study investigates the dynamic and bidirectional interplay between distinct forms of business diversification and bankruptcy risk within the context of an emerging market. Drawing on a balanced panel of 480 non-financial firms listed in Vietnam from 2014 to 2023, we employ a robust methodological framework combining two-step System Generalized Method of Moments (Sys.GMM) for analyzing direct effects and Panel Vector Autoregression (PVAR) for exploring systemic feedback loops. Bankruptcy risk is primarily measured using an ex-ante, model-based Expected Default Frequency (EDF), providing insights into firms’ forward-looking default probabilities. Our Sys.GMM estimations reveal that related diversification (RDIV) significantly and dynamically heightens EDF, suggesting an accumulation of risk from strategies involving closely connected industries. Conversely, current unrelated diversification (UDIV) is found to significantly reduce EDF, consistent with portfolio theory, although this risk-mitigating effect does not appear to persist significantly through its lagged term. The PVAR analysis, further corroborated by Impulse Response Functions (IRFs), uncovers significant bidirectional dynamics: while diversification strategies influence future bankruptcy risk, heightened bankruptcy risk, in turn, demonstrably constrains subsequent related and unrelated diversification activities. By illuminating the complex, time-dependent, and reciprocal relationships between diversification choices and firm solvency, this research offers actionable insights for corporate managers, investors, and policymakers navigating the volatile landscape of emerging economies, emphasizing the need for nuanced strategic considerations and proactive financial management.

Keywords: Business diversification; Bankruptcy risk; Related diversification; Unrelated diversification; GMM estimator; PVAR model (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s41283-025-00174-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:risman:v:27:y:2025:i:4:d:10.1057_s41283-025-00174-8

Ordering information: This journal article can be ordered from
https://www.palgrave.com/gp/journal/41283

DOI: 10.1057/s41283-025-00174-8

Access Statistics for this article

Risk Management is currently edited by Igor Loncarski

More articles in Risk Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().