The relationship between corporate’s growth volatility, business diversification and bankruptcy risk

Abstract

This study examines the impact of sales growth volatility on bankruptcy risk, with a focus on the mediating roles of two business diversification strategies: related diversification and unrelated diversification. Based on data from 77 non-financial firms listed in Vietnam from 2014 to 2023 (resulting in a total of 770 observations), the study employs the Generalized Structural Equation Model (GSEM) to assess both the direct and indirect effects of sales growth volatility on bankruptcy risk. The results indicate that higher sales growth volatility is positively associated with bankruptcy risk and influences firms’ diversification strategies. Specifically, related diversification may increase bankruptcy risk due to dependency on shared resources, while unrelated diversification helps mitigate risk by spreading business activities across different sectors. This research provides valuable insights into how firms manage risk through diversification and offers practical recommendations for managers and investors. The findings align with Signal Theory and Planned Behavior Theory, contributing to a deeper understanding of the role of diversification in responding to financial instability.