Oil price uncertainty and corporate diversification: Evidence from Chinese manufacturing firms

This study examines the effect of oil price uncertainty on corporate diversification using the Chinese manufacturing listed firms for the period from 2007 to 2019. From the risk hedging perspective, we find that firms are more likely to diversify across industries when oil price uncertainty increases. These findings are robust to utilize alternative measures of key variables, perform an instrumental variable regression, system GMM approach, the change regression, and consider other contemporaneous shocks. Further mediation analyses reveal that the increased diversification mainly results from the heightened operational risk and financing constraints of firms. Finally, we observe that the relation between oil price uncertainty and corporate diversification is more pronounced for firms with higher exposure to oil price and those with higher external profit pressure. Overall, our study sheds new light on the impact of oil price uncertainty on the firm-level activities, and contributes to the debate about the driving factors for the diversification trend in emerging markets.