Does corporate diversification strategy affect stock price crash risk?

How to strategically mitigate stock price crash risks has become an academic focus in recent years. In this paper, we draw from research in the crash risk and operations management fields to theorize that a firm's operations in multiple industries affect its likelihood of being subject to stock price crash events. This study uses a sample of 67,466 firm-year observations from 2000 to 2020 and finds that diversification substantially reduces crash risk, and such an influence is available under both unrelated and related diversification. We also determine that firms' storage of surplus labor or inventory resources and/or managers' high managerial ability significantly strengthen the effectiveness of diversification on crash risk. We particularly perform two additional tests, namely, a two-stage residual inclusion estimation and a matching combined difference-in-difference analysis, to mitigate endogeneity concerns, and the results hold.