Do geopolitical risks increase corporate risk‐taking?—Based on the perspective of diversification expansion

Research Question/Issue Does geopolitical risk increase a firm's risk‐taking, and will diversification expansion smooth out or exacerbate this effect? Research Findings/Insights 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. Theoretical/Academic Implications 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. Practitioner/Policy Implications 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.