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

- We examine the effect of crash-risk exposure on the speed of leverage adjustment.
- We investigate the role of information environment in reshaping the effect.
- Our sample includes 19,247 firms across 41 countries from 1989 to 2013.
- Increasing crash-risk exposure tends to reduce the speed of leverage adjustment.
- This negative relation is mitigated by a transparent information environment.

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.