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Review of Financial Studies Vol. 30 No. 5 2017

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

Omesh Kini1; Jaideep Shenoy2; Venkat Subramaniam3

1 Robinson College of Business Georgia State University , · 2 School of Business, University of Connecticut · 3 A.B. Freeman School of Business, Tulane University

Abstract

We study the impact of the financial condition of firms on firms’ 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 industry cash-flow shocks, we find that firms with higher leverage or distress likelihood have a greater probability of a product recall. These firms also face more frequent and severe recalls. Further, firms with more debt due at the onset of the financial crisis experience a greater likelihood and frequency of recalls. We conclude that a firm’s financial condition has real effects that impact product safety.

DOI
10.1093/rfs/hhw092
Volume
30
Issue
5
Pages
1790-1829
Language
en
Sources
crossref openalex

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