Zero-leverage policy and stock price crash risk: Evidence from Korea

Young Mok Choi and Kunsu Park

International Review of Financial Analysis, 2022, vol. 81, issue C

Abstract: This study examines the difference in stock price crash risk between zero-leverage and non-zero-leverage firms. We find that zero-leverage firms have a significantly higher future stock price crash risk than non-zero-leverage firms. Next, we find that the positive relation between zero-leverage policy and future stock price crash risk is more pronounced when firms have higher controlling shareholders' ownership and foreign ownership. We also find that the positive relation is more pronounced for firms with low cash holdings than for those with high cash holdings. Further, we find that the positive relation is stronger for dividend-paying firms than non-dividend-paying firms. Our results are robust to alternative estimation specifications and endogeneity concerns. Overall, our findings shed light on the extent to which extreme corporate financial policy has an impact on future stock price crash risk. Our empirical evidence also provides meaningful implications for how stakeholders (especially investors) predict stock price crash risk in the context of extremely conservative capital structure.

Keywords: Zero-leverage policy; Stock price crash risk; Controlling shareholders' ownership; Foreign ownership; Cash holdings; Dividend-paying status (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000722

DOI: 10.1016/j.irfa.2022.102102

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