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

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 ۱۱۱ listed companies of Tehran Stock Exchange for the period between ۲۰۰۹ and ۲۰۱۷ 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:

Stock Price , Crash risk , Business Strategy , Equity Overvaluation