Impact of Financial Leverage on the Incidence and Severity of Product Failures: Evidence from Product Recalls

55 Pages Posted: 11 Dec 2014

See all articles by Omesh Kini

Omesh Kini

Georgia State University

Jaideep Shenoy

University of Connecticut

Venkat Subramaniam

Tulane University

Date Written: November 1, 2014

Abstract

We study the impact of financial leverage on a firm’s ability to produce safer products that result in fewer recalls. Using a variety of tests, including two quasi-natural experiments that result in exogenous negative cash flow shocks, we find that firms with higher financial leverage or distress likelihood have a greater probability of a product recall. These firms also experience more frequent and severe recalls. Further tests indicate that, more than debt overhang, financial constraints is the channel through which leverage affects product failures. Overall, we show that a firm’s financial condition has real effects that impact product safety.

Keywords: Product failures, leverage, financial distress, product recalls

Suggested Citation

Kini, Omesh and Shenoy, Jaideep and Subramaniam, Venkat R., Impact of Financial Leverage on the Incidence and Severity of Product Failures: Evidence from Product Recalls (November 1, 2014). Available at SSRN: https://ssrn.com/abstract=2536111 or http://dx.doi.org/10.2139/ssrn.2536111

Omesh Kini

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Jaideep Shenoy (Contact Author)

University of Connecticut ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Venkat R. Subramaniam

Tulane University ( email )

A.B. Freeman School of Business
New Orleans, LA 70118
United States
504-865-5493 (Phone)
504-862-8327 (Fax)

HOME PAGE: http://www.tulane.edu/~vencat

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