Business strategy and stock price crash risk: The mediating role of financial constraints

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The global financial crisis increased uncertainty in economic policy. Firms manage challenges through business strategies and financial constraints and deal with crash risk more proactively to overcome these impediments. This paper investigates the mediating role of financial constraints in the association between business strategy and crash risk, and the type of business strategy that influenced crash risk in Egyptian firms from 2014 to 2021. Data were obtained from financial statements and reports available in the Thomson Reuters database. A total of 792 observations were collected, representing 99 Egyptian firms. The statistical techniques employed in the analysis included ordinary least squares, modified least squares, and path analysis. The results indicate that a higher financial constraint ratio increases crash risk and has a mediating effect on business strategy and crash risk. Results show a positive impact of prospector strategy on crash risk using OLS and GLS, in line with the bad news hoarding hypothesis. Further research shows that prospector strategies have a positive effect on financial constraints. Egyptian firms have higher levels of information asymmetry, which leads to adopting a prospector business strategy and exerts a more pronounced positive influence on the likelihood of crash risk. A robustness check confirms the positive effect of financial constraints as a mediator variable on the relationship between prospector business strategy and crash risk.

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    • Table 1. Relevant sectors
    • Table 2. Measurements of variables
    • Table 3. Descriptive analysis
    • Table 4. Correlation table
    • Table 5. OLS and GLS results
    • Table 6. Hypothesis testing results
    • Table 7. Effect size of the financial constraints as a mediator variable for the fourth hypothesis
    • Table 8. Robustness check
    • Table 9. Robustness check for the effect size of the financial constraints as a mediator variable
    • Conceptualization
      Mohamed Rezk Omara
    • Data curation
      Mohamed Rezk Omara
    • Formal Analysis
      Mohamed Rezk Omara
    • Funding acquisition
      Mohamed Rezk Omara
    • Investigation
      Mohamed Rezk Omara, Ahmed Rashed
    • Methodology
      Mohamed Rezk Omara, Ahmed Rashed
    • Validation
      Mohamed Rezk Omara, Ahmed Rashed
    • Visualization
      Mohamed Rezk Omara, Ahmed Rashed
    • Writing – original draft
      Mohamed Rezk Omara, Ahmed Rashed
    • Writing – review & editing
      Mohamed Rezk Omara, Ahmed Rashed
    • Project administration
      Ahmed Rashed
    • Resources
      Ahmed Rashed
    • Software
      Ahmed Rashed
    • Supervision
      Ahmed Rashed