Environmental Uncertainty and Idiosyncratic Risk: The Dual Role of Diversification Strategy

Abstract

In response to escalating environmental uncertainty, corporate executives typically adjust their business strategy between diversification and refocusing. This study examines the effect of environmental uncertainty on idiosyncratic risk, as well as the moderating impact of diversification on this relationship. Utilizing a sample of companies listed on the Chinese stock market from 2005 to 2019, the results suggest that a significant positive correlation exists between uncertainty and idiosyncratic risk. As environmental uncertainty escalates, corporate managers increasingly opt for diversification before eventually refocusing their business strategy. Furthermore, while moderate diversification can mitigate the impact of uncertainty on idiosyncratic risk, excessive diversification intensifies this correlation. This research holds considerable significance for understanding the influence mechanism of idiosyncratic risk and ensuring the stability of the capital market.