Investigating the Effect of Business Strategy and Stock Price Synchronicity on Stock Price Crash Risk

Document Type: Research Paper


1 Department of Financial Management, Tehran North Branch, Islamic Azad University, Tehran-Iran

2 Department of Accounting, Tehran North Branch, Islamic Azad University, Tehran-Iran



Stock price crash risk has a significant impact on investors, creditors, managers, and shareholders, so the prediction of this phenomenon is a very important issue in investment and risk management decisions. This research investigates the
effect of business strategy and stock price synchronicity on stock price crash risk. Following Bentley et al.[2], composite strategy score has been used to proxy for an organization’s business strategy, expanded market model regression
following Chen et al. [3] to measure the firm-specific crash risk, and R2 method of Johnstone [14] to calculate the stock price synchronicity. In order to achieve this point, financial information of 171 companies that are listed on
Tehran stock exchange have been selected during the time period of 2013 to 2018, and data was analysed using regression model. According to the results,
companies with defender (analyser and prospector) business strategy are less (more) prone to future crash risk. Moreover, results show that stock price syn-chronicity has positive effect on stock price crash risk, while in companies with analyser business strategy it can reduce the stock price crash risk. The interactive effect of business strategy and stock price synchronicity on stock price crash risk in companies with prospector and defender business strategy is not significant. Other findings suggest that Institutional ownership has positive, and company’s age has negative effect on stock price crash risk.


Main Subjects

[1] An, H.; Zhang, T. Stock Price Synchronicity, Crash Risk and Institutional Investors, Corporate Finance, 2013, 21(4), P.1-15, DOI:10.1016/j.jcorpfin.2013.01.001.


[2] Bentley, K.A., Omer, T.C., Sharp, N.Y., Business Strategy, Financial Reporting Irregularities and Audit
, Contemporary Accounting Research, 2013, 30 (2), 780–817.DOI:10.2139/ssrn.1705726.


[3] Chen, J., Hong, H., Stein, J.C., Forecasting Crashes, Trading Volume, Past Returns, and Conditional Skewness in Stock Prices, Journal of Finance Economics, 2001, 61(3), P. 345–391, DOI: 10.1016/S0304-405(01)00066-6.


[4] Dibachi, H., Behzadi. MH, Izadikhah, M., Stochastic Modified MAJ Model for Measuring the Efficiency and Ranking of DMUs, Indian Journal of Science and Technology, 2015, 8 (8), P. 549–555, Doi: 10.17485/ijst/2015/v8iS8/71505


[5] Feiyang, C., Chaoshin, C., Zhenming, F., Chunfeng, W., Shouyu, Y., Raising short-term debt for long-term investment and stock price crash risk: Evidence from China, Finance Research Letters, 2019, DOI: 10.1016/


[6] Guang-Zheng C., Edmund C. K., The impact of business strategy on insider trading profitability, Pacific-Basin Finance Journal, 2019, 55, P. 270-282, DOI: 10.1016/j.pacfin.2019.04.007


[7] Habib, A., Monzur Hasan, M., Business Strategy,Overvalued Equities, and Stock Price Crash Risk. Research in International Business and Finance, 2017, 39(Part A), P. 389–405,DOI: 10.1016/j.ribaf.2016.09.011.


[8] Hajiha Z., Prospector and Defender Business strategy, Information Asymmetry, and Stock Price Crash, Financial Engineering and Portfolio Management, 8(31), 2017, P. 75-94, (in Persian).


[9] Hambrick, D.C., Some Tests of the Effectiveness and Functional Attributes of Miles and Snow’s Strategic Types,Academy of Management Journal,2017, 26 (1), P.5-26,DOI:


[10] Heng A., Zhang, T.,Stock Price Synchronicity, Crash Risk, and Institutional Investors. Journal of Corporate Finance, 2013,21(2),DOI: 10.1016/j.jcorpfin.2013.01.001


[11] Harrison, H.,Stein, J., Differences of Opinion, Short-Sales Constraints and Market Crashes, Review of
Financial Studies, 16 (4): P.487-525.DOI: 10.3386/w7376


[12] Hutton, A.P., Marcus, A.J., Tehranian, H., Opaque Financial Reports, R2, and Crash Risk, Journal ofFinance Economics, 2009, 94 (1), P.67-86, DOI: 10.1016/j.jfineco.2008.10.003.


[13] Izadikhah, M., Using goal programming method to solve DEA problems with value judgments, Yugoslav Journal of Operations Research, 2016, 24 (2), P. 267 – 282, Doi: 10.2298/YJOR121221015I


[14] Jin, L., Myers, S.C., R2 around the World: New Theory and New Tests, Journal of Finance Economics, 79 (2), 2006, P. 257-292, DOI: 10.1016/j.jfineco.2004.11.003.


[15] Jin, Y., Yan Yuqin, X., Liu, C. Stock Price Synchronicity and Stock Price Crash Risk: Based on the Mediating Effect Of Herding Behaviour of QFII, China Finance Review International, 2016, 6(3),P. 230-244, DOI: 10.1108/CFRI-05-2015-0047.


[16] Johnston, J. A., Accruals Quality and Price Synchronicity, University of Louisiana State & SSRN. (2009),


[17] Kai, X., Xiaoguang, Y., How to detect crashes before they burst: Evidence from Chinese stock market, Physica A: Statistical Mechanics and its Applications, 2019, 528, DOI: 10.1016/j.physa.2019.121392


[18] Kaijuan, G., Wanfa, L., Li, Y., Kam C. C., The impact of analyst coverage and stock price synchronicity: Evidence from brokerage mergers and closures, Finance Research Letters, 2019, DOI: 10.1016/


[19] Kim, J., Zhang, L, Accounting Conservatism and Stock Price Crash Risk: Firm-level Evidence, Contemporary Accounting Research, 2016, 33(1), P. 412-441,DOI:10.1111/1911-3846.12112.


[20] Kim, J.B., Li, Y., Zhang, L., Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis. Journal of Financial Economics, 2011, 100 (3), P.639-662. DOI:10.1016/j.jfineco.2010.07.007.


[21] Matinfard, M., SalahVarzi, S., Test the Effectiveness of Stock Price Synchronicity on Risk of Stock Price
Financial Knowledge of Securities Analysis, 2018, 11(38), P. 101-115, (in Persian).


[22] Miles, R.E., Snow, C.C., Organizational Strategy, Structure, and Process. Stanford University Press,
Stanford, CA, 2003.


[23] Ning Jia., Corporate innovation strategy and stock price crash risk, journal of Corporate Finance, 2018, 53, P. 155-173, DOI: 10.1016/j.jcorpfin.2018.10.006.


[24] Pasandideh Parsa, B., Sarraf, F., Financial Statement Comparability and the Expected Crash Risk of Stock Prices, Advances in Mathematical Finance & Applications, Article 7, Volume 3, Issue 3, Summer 2018, Page 77-93. DOI: 10.22034/AMFA.2018.544951


[25] Serve, F., Malekian, E., Fakhari, H., Ghasemi, J., Predict the Stock price crash risk by using firefly algorithm and comparison with regression, Advances in Mathematical Finance & Applications, Article 4, Volume 3, Issue 2, Spring 2018, Page 43-58. DOI: 10.22034/AMFA.2018.540830


[26] Song L., AccountingDisclosure, Stock Price Synchronicity and Stock Crash Risk. International Journal of Accounting & Information Management, 2015, 23(4), P. 336-349. DOI: 10.1108/IJAIM-02-2015-0007.


[27] Soltanizadeh S., Zaleha, S., Rasid A., Mottaghi Golshan, N., Business Strategy, Enterprise Risk Management and Organizational Performance. Management Research Review, 2015, 39(9), P.1016-1033, DOI: 10.1108/MRR-05-2015-0107.


[28] Snow, C.C., Hambrick, D.C., Measuring Organizational Strategies: Some Theoretical and
Methodological Problems
,The Academy of Management Review, 1980, 5 (4), 527-538.DOI: 10.2307/257458


[29] TavakolNia, E., Investigating the Relationship between Business Strategy and Human Capital Reporting Using GMM Method, Journal of Accounting Research, 2013, 3(3), P. 109-127, DOI: 10.22051/ijar.2014.465, (in Persian).