Forecasting Crash risk using Business Strategy, Equity Overvaluation and Conditional Skewness in Stock Price

Document Type: Original Article

Authors

1 PhD Candidate, Faculty of Management, Tehran North Branch, Islamic Azad University, Tehran, Iran.

2 Department of Finance and Economic, Central Tehran branch, Islamic Azad University, Tehran, Iran. (Corresponding Author)

3 Department of Accounting and Finance, North Tehran Branch, Islamic Azad University, Tehran, Iran.

Abstract

A firm is called to have stock price crash risk if the firm has a tendency to experience a sudden drop in its stock price. In this study, the relation between the firm-level of business strategy and future stock price crash risk Is examined, as well as the effect of stock overvaluation on the relationship between business strategy and crash risk investigated. Using the strategy index and crash risk indicators the question that whether innovative business strategies (prospectors) are more prone to future crash risk than defenders is investigated. In so doing, we identify two main hypotheses and the data of 111 listed companies of Tehran Stock Exchange for the period between 2009 and 2017 were analyzed and a panel data approach has been used to test of research hypotheses.
We develop a measure of business strategy based on Miles and Snow and test the association between this business strategy measure, overvaluation and stock price crash risk. Our investigations show that overvalued firms on average have higher price crash risk.

Keywords


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