Business Strategy, Market Power and Stock Price Crash Risk: Evidence from China

Abstract Business strategies play a vital role in a firm’s success but, if not properly executed, can lead to financial irregularities and mispricing, influencing the firm’s performance and leading to stock price crash risk. The present study examines the impact of a firm’s business strategy and market power on stock price crash risk. Following Miles and Snow’s (2003) model, we classify Chinese firms listed on the Shenzhen and Shanghai stock exchanges into defenders (conservative) and prospectors’ (aggressive) business strategies over a period of 2006–2019. We employed industry and year fixed effects regression to show that prospectors who follow aggressive strategies are more prone to stock price crash risk than defenders who follow conservative strategies. Additionally, we show that firms with high market power also contribute to increased stock price crash risk. Our results are also robust to alternative control variables and different statistical models like the two-stage least squares method.