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Firm crash risk, information environment, and speed of leverage adjustment

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  • An, Zhe
  • Li, Donghui
  • Yu, Jin

Abstract

This paper examines the effect of a firm's crash-risk exposure on its speed of leverage adjustment (SOA), and how this effect is influenced by the information environment of the country in which the firm is located. We employ a panel of 19,247 firms across 41 countries from 1989 to 2013, and we find that firms with a higher crash-risk exposure tend to adjust their financial leverages more slowly toward their targets. This evidence supports the dynamic trade-off theory that firms with larger transaction costs adjust their capital structures less often. Equally important, we document that the negative link between crash-risk exposure and SOA is less pronounced in countries with a more transparent information environment.

Suggested Citation

  • An, Zhe & Li, Donghui & Yu, Jin, 2015. "Firm crash risk, information environment, and speed of leverage adjustment," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 132-151.
    • Handle: RePEc:eee:corfin:v:31:y:2015:i:c:p:132-151
    DOI: 10.1016/j.jcorpfin.2015.01.015
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    More about this item

    Keywords

    Capital structure dynamics; Information asymmetry; Crash risk; Information environment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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