Firm Crash Risk, Information Environments, and Speed of Leverage Adjustment
57 Pages Posted: 12 Aug 2013
Date Written: August 12, 2013
This paper examines the effect of firm crash-risk exposure on the speed of leverage adjustment (SOA), and how this effect is influenced by information environments, by employing a large panel of 19,254 firms across 39 countries spanning the years 1989 to 2009. We find that firms exposed to a higher crash risk tend to adjust their financial leverage toward their targets more slowly. This relation is more pronounced for over-leveraged firms. The empirical evidence supports the pecking order theory and the dynamic trade-off theory. We also find that, among the over-leveraged firms, the documented negative association between crash-risk exposure and leverage adjustment is attenuated by strong information environments at country level.
Keywords: Capital structure dynamics, information asymmetry, crash risk, information environments
JEL Classification: G32, G15
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