International capital structure, stock price crash risk and corporate governance

This thesis employs data from 34,222 firms in 47 countries from 1987 to 2009, which corresponds to 248,156 firm year observations. Inspired by recent stock price crash risk studies, this thesis differentiates stock price crash risk from traditional stock price risk in explaining capital structure decisions. Equity issuance is costly if severe information asymmetry exists between inside managers and outside investors. Stock price crash results from activities where accumulated bad information hided by managers cannot be stockpiled anymore. Thus stock price crash risk is viewed as a proxy of information asymmetry which in turn influencing capital structure. The empirical evidence shows that stock price crash risk is positively associated with financial leverage. Further, this thesis finds that less debt is issued for firms in countries which have a transparent information environment. Moreover, efficient macro governance and regulation, strong shareholder and creditor protection, and transparent information environment drive financial leverage less sensitive to stock price crash risk.