Investor Reaction to Firm Instability: A Multidimensional Analysis of Growth Volatility

Abstract

Purpose: This study examines the impact of growth volatility on investor behavior.
Design/methodology/approach: Drawing on a theoretical framework that combines signaling theory and behavioral finance, the study argues that instability in a firm's fundamental operations serves as a significant risk signal interpreted by the market. To test this relationship, the study employs a multidimensional measure for growth volatility, comprising four main components: volatility in the growth of sales, operating profit, assets, and labor. Panel data from 470 non-financial listed firms in the Vietnamese stock market for the period 2013–2023 and a regression model with Panel-Corrected Standard Errors (PCSE) are utilized.
Findings: The empirical results indicate that all four components of growth volatility have a positive and statistically significant impact on investor reaction. The instability in sales and profit demonstrates the strongest effects.
Originality/value: These findings indicate that investors in Vietnam are highly sensitive to risk signals arising from firms' internal operations, and they underscore the importance of considering growth volatility as a multidimensional construct for a comprehensive assessment of firm risk.