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

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