Does geopolitical risk increase a firm's risk-taking, and will diversification expansion smooth out or exacerbate this effect?
Based on microdata of Chinese A-share listed companies, we find that (1) geopolitical risk significantly increases corporate risk-taking at both micro and macro levels; (2) horizontal diversification can significantly smooth out the impact of geopolitical risk on a firm's risk-taking, while vertical diversification will exacerbate the effect; (3) geopolitical risk and diversification do not significantly impact all firms, and their effect are limited to non-state-owned enterprises and firms in manufacturing industries.
First, compared with the previous studies, this paper identifies the geopolitical risk faced by each sample firm separately, thus providing a more accurate analysis of the impact of the specific geopolitical risk faced by the firm on its risk-taking. Second, we expand the connotation of diversification and analyze its moderating effect on corporate risk-taking from the perspective of horizontal and vertical diversification. Third, considering that the degree of political affiliation and capital intensity may affect a firm's sensitivity to geopolitical risk, this paper examines the relationship between geopolitical risk, diversification, and a firm's risk-taking regarding property rights and industry type.
On the one hand, export-oriented firms should pay close attention to the geopolitical risk situation in exporting countries to reduce the adverse impact of sudden geopolitical risks. On the other hand, diversification expansion is a double-edged sword for firms. Although vertical diversification increases the risk-taking of a firm, it also increases its specialization. Therefore, it is necessary to make a comprehensive judgment on whether and what kind of diversification an enterprise should undertake according to its business development status.