Firm Crash Risk, Information Environments, and Speed of Leverage Adjustment

57 Pages Posted: 12 Aug 2013

See all articles by Zhe An

Zhe An

Monash Business School; Financial Research Network (FIRN)

Donghui Li

UNSW Australia Business School, School of Banking and Finance

Jin Yu

Monash University -Department of Banking and Finance

Date Written: August 12, 2013

Abstract

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

Suggested Citation

An, Zhe and Li, Donghui and Yu, Jin, Firm Crash Risk, Information Environments, and Speed of Leverage Adjustment (August 12, 2013). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2308729 or http://dx.doi.org/10.2139/ssrn.2308729

Zhe An (Contact Author)

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Donghui Li

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Jin Yu

Monash University -Department of Banking and Finance ( email )

Melbourne
Australia
+61 3 99034590 (Phone)

HOME PAGE: http://sites.google.com/site/jinyufinecon/

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