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

Omesh Kini; Jaideep Shenoy; Venkat Subramaniam

doi:10.1093/rfs/hhw092

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

Review of Financial Studies 2017

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 (5)
Pages: 1790-1829
Language: en
Export: BibTeX
Sources: crossref openalex