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

Omesh Kini, Jaideep Shenoy and Venkat Subramaniam

The Review of Financial Studies, 2017, vol. 30, issue 5, 1790-1829

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.

JEL-codes: G30 G31 G33 G38 L15 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (27)

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