Table 6 Financial distress analysis...

Table 6

Financial distress analysis

Panel A: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986–2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed firms (N = 74,849) – Total liabilities
Equation (4a)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(TL/CE)_t	0.2921^*** (38.5449)	0.2093^*** (28.9193)	0.0828^*** (0.0000)	0.2209^*** (32.0554)	0.1251^*** (17.8885)	0.0958^*** (0.0000)	0.2283^*** (31.8976)	0.1265^*** (16.9214)	0.1018^*** (0.0000)
Δ(STD_ROA)_t	0.0844^*** (11.9629)	0.0226^*** (4.2872)	0.0618^*** (0.0000)	0.0931^*** (14.3050)	0.0856^*** (17.0392)	0.0075 (0.3630)	0.0828^*** (12.4545)	0.0506^*** (10.1290)	0.0322^*** (0.0001)
Δ(BID_ASK)_t	0.1783^*** (20.8677)	0.1687^*** (22.1971)	0.0096 (0.3980)	0.1778^*** (23.1255)	0.1511^*** (22.8205)	0.0267^*** (0.0093)	0.1833^*** (23.0170)	0.1683^*** (24.8301)	0.0150 (0.1520)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.62	1.88		1.62	1.88		1.62	1.88
Adjusted R²	0.267	0.175		0.339	0.248		0.334	0.249
F-value	96.05^***	116.80^***		98.50^***	119.50^***		88.15^***	106.30^***
Note(s): Financially distressed firms are distinguished from nondistressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10 respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel A: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986–2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed firms (N = 74,849) – Total liabilities
Equation (4a)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(TL/CE)_t	0.2921^*** (38.5449)	0.2093^*** (28.9193)	0.0828^*** (0.0000)	0.2209^*** (32.0554)	0.1251^*** (17.8885)	0.0958^*** (0.0000)	0.2283^*** (31.8976)	0.1265^*** (16.9214)	0.1018^*** (0.0000)
Δ(STD_ROA)_t	0.0844^*** (11.9629)	0.0226^*** (4.2872)	0.0618^*** (0.0000)	0.0931^*** (14.3050)	0.0856^*** (17.0392)	0.0075 (0.3630)	0.0828^*** (12.4545)	0.0506^*** (10.1290)	0.0322^*** (0.0001)
Δ(BID_ASK)_t	0.1783^*** (20.8677)	0.1687^*** (22.1971)	0.0096 (0.3980)	0.1778^*** (23.1255)	0.1511^*** (22.8205)	0.0267^*** (0.0093)	0.1833^*** (23.0170)	0.1683^*** (24.8301)	0.0150 (0.1520)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.62	1.88		1.62	1.88		1.62	1.88
Adjusted R²	0.267	0.175		0.339	0.248		0.334	0.249
F-value	96.05^***	116.80^***		98.50^***	119.50^***		88.15^***	106.30^***
Note(s): Financially distressed firms are distinguished from nondistressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10 respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel B: Association of leverage on idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed firms (N = 74,849) – Total liabilities and total preferred stock
Equation (4b)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(TL/CE)_t	0.2863^*** (37.1271)	0.2084^*** (28.8023)	0.0779^*** (0.0000)	0.2158^*** (30.7980)	0.1235^*** (17.5851)	0.0923^*** (0.0000)	0.2231^*** (30.5148)	0.1266^*** (16.9115)	0.0965^*** (0.0000)
Δ(PS/CE)_t	0.0257^*** (3.7218)	0.0047 (0.8746)	0.0210^** (0.0168)	0.0223^*** (3.6607)	0.0092^* (1.7441)	0.0131^* (0.0999)	0.0230^*** (3.7236)	−0.0012 (−0.2199)	0.0242^*** (0.0029)
Δ(STD_ROA)_t	0.0842^*** (11.9487)	0.0226^*** (4.2910)	0.0616^*** (0.0000)	0.0930^*** (14.3027)	0.0856^*** (17.0085)	0.0074 (0.3680)	0.0827^*** (12.4551)	0.0506^*** (10.1160)	0.0321^*** (0.0001)
Δ(BID_ASK)_t	0.1777^*** (20.8179)	0.1686^*** (22.1893)	0.0091 (0.4170)	0.1774^*** (23.0965)	0.1509^*** (22.7950)	0.0265^*** (0.0098)	0.1828^*** (22.9921)	0.1683^*** (24.8329)	0.0145 (0.1640)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.62	1.88		1.62	1.88		1.62	1.88
Adjusted R²	0.267	0.175		0.340	0.249		0.334	0.249
F-value	94.33^***	114.7^***		96.90^***	117.4^***		86.65^***	104.2^***
Note(s): Financially distressed firms are distinguished from non-distressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel B: Association of leverage on idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed firms (N = 74,849) – Total liabilities and total preferred stock
Equation (4b)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(TL/CE)_t	0.2863^*** (37.1271)	0.2084^*** (28.8023)	0.0779^*** (0.0000)	0.2158^*** (30.7980)	0.1235^*** (17.5851)	0.0923^*** (0.0000)	0.2231^*** (30.5148)	0.1266^*** (16.9115)	0.0965^*** (0.0000)
Δ(PS/CE)_t	0.0257^*** (3.7218)	0.0047 (0.8746)	0.0210^** (0.0168)	0.0223^*** (3.6607)	0.0092^* (1.7441)	0.0131^* (0.0999)	0.0230^*** (3.7236)	−0.0012 (−0.2199)	0.0242^*** (0.0029)
Δ(STD_ROA)_t	0.0842^*** (11.9487)	0.0226^*** (4.2910)	0.0616^*** (0.0000)	0.0930^*** (14.3027)	0.0856^*** (17.0085)	0.0074 (0.3680)	0.0827^*** (12.4551)	0.0506^*** (10.1160)	0.0321^*** (0.0001)
Δ(BID_ASK)_t	0.1777^*** (20.8179)	0.1686^*** (22.1893)	0.0091 (0.4170)	0.1774^*** (23.0965)	0.1509^*** (22.7950)	0.0265^*** (0.0098)	0.1828^*** (22.9921)	0.1683^*** (24.8329)	0.0145 (0.1640)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.62	1.88		1.62	1.88		1.62	1.88
Adjusted R²	0.267	0.175		0.340	0.249		0.334	0.249
F-value	94.33^***	114.7^***		96.90^***	117.4^***		86.65^***	104.2^***
Note(s): Financially distressed firms are distinguished from non-distressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel C: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed firms (N = 74,849) – Liability components and total preferred stock
Equation (4c)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(COL/CE)_t	0.1828^*** (19.6064)	0.1381^*** (16.3540)	0.0447^*** (0.0002)	0.1454^*** (18.1849)	0.0722^*** (9.1471)	0.0732^*** (0.0000)	0.1540^*** (19.1132)	0.0754^*** (9.4627)	0.0786^*** (0.0000)
Δ(NCOL/CE)_t	0.0604^*** (8.7369)	0.0459^*** (6.9318)	0.0145 (0.1180)	0.0543^*** (8.9659)	0.0378^*** (6.2459)	0.0165^** (0.0487)	0.0511^*** (7.8487)	0.0461^*** (7.3999)	0.0050 (0.5680)
Δ(STD/CE)_t	0.0940^*** (11.9678)	0.0533^*** (7.8878)	0.0407^*** (0.0001)	0.0658^*** (9.1928)	0.0309^*** (4.4397)	0.0349^*** (0.0005)	0.0647^*** (8.8323)	0.0301^*** (4.0493)	0.0346^*** (0.0009)
Δ(NCFL/CE)_t	0.0705^*** (8.9739)	0.0456^*** (6.1766)	0.0249^** (0.0156)	0.0365^*** (5.0383)	0.0331^*** (4.6372)	0.0034 (0.7360)	0.0437^*** (5.9271)	0.0298^*** (3.9571)	0.0139 (0.1760)
Δ(PS/CE)_t	0.0243^*** (3.5354)	0.0048 (0.8964)	0.0195^** (0.0259)	0.0216^*** (3.5528)	0.0099^* (1.8656)	0.0117 (0.1390)	0.0218^*** (3.5209)	−0.0004 (−0.0686)	0.0222^*** (0.0064)
Δ(STD_ROA)_t	0.0797^*** (11.3740)	0.0220^*** (4.1767)	0.0577^*** (0.0000)	0.0892^*** (13.7660)	0.0852^*** (16.9844)	0.0040 (0.6270)	0.0788^*** (11.9209)	0.0502^*** (10.0752)	0.0286^*** (0.0004)
Δ(BID_ASK)_t	0.1728^*** (20.1100)	0.1676^*** (22.0075)	0.0052 (0.6480)	0.1735^*** (22.6119)	0.1510^*** (22.6910)	0.0225^** (0.0291)	0.1790^*** (22.5737)	0.1689^*** (24.7898)	0.0101 (0.3300)
Lagged variable terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.74	2.27		1.74	2.27		1.74	2.27
Adjusted R²	0.271	0.176		0.343	0.249		0.338	0.250
F-value	89.95^***	109.0^***		91.98^***	111.5^***		83.25^***	98.98^***
Note(s): Financially distressed firms are distinguished from nondistressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel C: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed firms (N = 74,849) – Liability components and total preferred stock
Equation (4c)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(COL/CE)_t	0.1828^*** (19.6064)	0.1381^*** (16.3540)	0.0447^*** (0.0002)	0.1454^*** (18.1849)	0.0722^*** (9.1471)	0.0732^*** (0.0000)	0.1540^*** (19.1132)	0.0754^*** (9.4627)	0.0786^*** (0.0000)
Δ(NCOL/CE)_t	0.0604^*** (8.7369)	0.0459^*** (6.9318)	0.0145 (0.1180)	0.0543^*** (8.9659)	0.0378^*** (6.2459)	0.0165^** (0.0487)	0.0511^*** (7.8487)	0.0461^*** (7.3999)	0.0050 (0.5680)
Δ(STD/CE)_t	0.0940^*** (11.9678)	0.0533^*** (7.8878)	0.0407^*** (0.0001)	0.0658^*** (9.1928)	0.0309^*** (4.4397)	0.0349^*** (0.0005)	0.0647^*** (8.8323)	0.0301^*** (4.0493)	0.0346^*** (0.0009)
Δ(NCFL/CE)_t	0.0705^*** (8.9739)	0.0456^*** (6.1766)	0.0249^** (0.0156)	0.0365^*** (5.0383)	0.0331^*** (4.6372)	0.0034 (0.7360)	0.0437^*** (5.9271)	0.0298^*** (3.9571)	0.0139 (0.1760)
Δ(PS/CE)_t	0.0243^*** (3.5354)	0.0048 (0.8964)	0.0195^** (0.0259)	0.0216^*** (3.5528)	0.0099^* (1.8656)	0.0117 (0.1390)	0.0218^*** (3.5209)	−0.0004 (−0.0686)	0.0222^*** (0.0064)
Δ(STD_ROA)_t	0.0797^*** (11.3740)	0.0220^*** (4.1767)	0.0577^*** (0.0000)	0.0892^*** (13.7660)	0.0852^*** (16.9844)	0.0040 (0.6270)	0.0788^*** (11.9209)	0.0502^*** (10.0752)	0.0286^*** (0.0004)
Δ(BID_ASK)_t	0.1728^*** (20.1100)	0.1676^*** (22.0075)	0.0052 (0.6480)	0.1735^*** (22.6119)	0.1510^*** (22.6910)	0.0225^** (0.0291)	0.1790^*** (22.5737)	0.1689^*** (24.7898)	0.0101 (0.3300)
Lagged variable terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.74	2.27		1.74	2.27		1.74	2.27
Adjusted R²	0.271	0.176		0.343	0.249		0.338	0.250
F-value	89.95^***	109.0^***		91.98^***	111.5^***		83.25^***	98.98^***
Note(s): Financially distressed firms are distinguished from nondistressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel D: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed Firms (N = 74,849) – Liability components and redeemable/nonredeemable preferred stock classes
Equation (4d)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(COL/CE)_t	0.1837^*** (19.7068)	0.1382^*** (16.3913)	0.0455^*** (0.0002)	0.1459^*** (18.2197)	0.0722^*** (9.1544)	0.0737^*** (0.0000)	0.1545^*** (19.1729)	0.0753^*** (9.4453)	0.0787^*** (0.0000)
Δ(NCOL/CE)_t	0.0605^*** (8.7416)	0.0459^*** (6.9299)	0.0146 (0.1160)	0.0544^*** (8.9616)	0.0378^*** (6.2405)	0.0166^** (0.0486)	0.0511^*** (7.8424)	0.0461^*** (7.3957)	0.0050 (0.5720)
Δ(STD/CE)_t	0.0942^*** (11.9899)	0.0534^*** (7.8979)	0.0408^*** (0.0001)	0.0659^*** (9.2043)	0.0309^*** (4.4348)	0.0350^*** (0.0005)	0.0648^*** (8.8450)	0.0301^*** (4.0457)	0.0347^*** (0.0008)
Δ(NCFL/CE)_t	0.0710^*** (9.0479)	0.0458^*** (6.2016)	0.0252^** (0.0147)	0.0366^*** (5.0590)	0.0332^*** (4.6411)	0.0034 (0.7310)	0.0439^*** (5.9632)	0.0299^*** (3.9645)	0.0140 (0.1730)
Δ(PSR/CE)_t	0.0150^** (2.3970)	−0.0018 (−0.3792)	0.0168^** (0.0313)	0.0192^*** (3.3835)	0.0059 (1.2753)	0.0133^* (0.0766)	0.0200^*** (3.5372)	−0.0006 (−0.1314)	0.0206^*** (0.0057)
Δ(PSNR/CE)_t	0.0138^** (2.0248)	0.0046 (0.8356)	0.0092 (0.2940)	0.0093 (1.5364)	0.0084 (1.5776)	0.0009 (0.9100)	0.0090 (1.4867)	−0.0002 (−0.0344)	0.0092 (0.2510)
Δ(STD_ROA)_t	0.0796^*** (11.3643)	0.0221^*** (4.1921)	0.0575^*** (0.0000)	0.0892^*** (13.7493)	0.0853^*** (16.9896)	0.0039 (0.6360)	0.0788^*** (11.9160)	0.0502^*** (10.0759)	0.0286^*** (0.0005)
Δ(BID_ASK)_t	0.1730^*** (20.1339)	0.1676^*** (22.0013)	0.0054 (0.6320)	0.1737^*** (22.6417)	0.1509^*** (22.6771)	0.0228^** (0.0267)	0.1792^*** (22.6111)	0.1688^*** (24.7850)	0.0100 (0.3160)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.73	2.27		1.73	2.27		1.73	2.27
Adjusted R²	0.271	0.176		0.343	0.249		0.337	0.250
F-value	88.62^***	106.9^***		90.70^***	109.6^***		81.93^***	97.17^***
Note(s): Financially distressed firms are distinguished from nondistressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel D: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed Firms (N = 74,849) – Liability components and redeemable/nonredeemable preferred stock classes
Equation (4d)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(COL/CE)_t	0.1837^*** (19.7068)	0.1382^*** (16.3913)	0.0455^*** (0.0002)	0.1459^*** (18.2197)	0.0722^*** (9.1544)	0.0737^*** (0.0000)	0.1545^*** (19.1729)	0.0753^*** (9.4453)	0.0787^*** (0.0000)
Δ(NCOL/CE)_t	0.0605^*** (8.7416)	0.0459^*** (6.9299)	0.0146 (0.1160)	0.0544^*** (8.9616)	0.0378^*** (6.2405)	0.0166^** (0.0486)	0.0511^*** (7.8424)	0.0461^*** (7.3957)	0.0050 (0.5720)
Δ(STD/CE)_t	0.0942^*** (11.9899)	0.0534^*** (7.8979)	0.0408^*** (0.0001)	0.0659^*** (9.2043)	0.0309^*** (4.4348)	0.0350^*** (0.0005)	0.0648^*** (8.8450)	0.0301^*** (4.0457)	0.0347^*** (0.0008)
Δ(NCFL/CE)_t	0.0710^*** (9.0479)	0.0458^*** (6.2016)	0.0252^** (0.0147)	0.0366^*** (5.0590)	0.0332^*** (4.6411)	0.0034 (0.7310)	0.0439^*** (5.9632)	0.0299^*** (3.9645)	0.0140 (0.1730)
Δ(PSR/CE)_t	0.0150^** (2.3970)	−0.0018 (−0.3792)	0.0168^** (0.0313)	0.0192^*** (3.3835)	0.0059 (1.2753)	0.0133^* (0.0766)	0.0200^*** (3.5372)	−0.0006 (−0.1314)	0.0206^*** (0.0057)
Δ(PSNR/CE)_t	0.0138^** (2.0248)	0.0046 (0.8356)	0.0092 (0.2940)	0.0093 (1.5364)	0.0084 (1.5776)	0.0009 (0.9100)	0.0090 (1.4867)	−0.0002 (−0.0344)	0.0092 (0.2510)
Δ(STD_ROA)_t	0.0796^*** (11.3643)	0.0221^*** (4.1921)	0.0575^*** (0.0000)	0.0892^*** (13.7493)	0.0853^*** (16.9896)	0.0039 (0.6360)	0.0788^*** (11.9160)	0.0502^*** (10.0759)	0.0286^*** (0.0005)
Δ(BID_ASK)_t	0.1730^*** (20.1339)	0.1676^*** (22.0013)	0.0054 (0.6320)	0.1737^*** (22.6417)	0.1509^*** (22.6771)	0.0228^** (0.0267)	0.1792^*** (22.6111)	0.1688^*** (24.7850)	0.0100 (0.3160)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.73	2.27		1.73	2.27		1.73	2.27
Adjusted R²	0.271	0.176		0.343	0.249		0.337	0.250
F-value	88.62^***	106.9^***		90.70^***	109.6^***		81.93^***	97.17^***
Note(s): Financially distressed firms are distinguished from nondistressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^*, ^, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept, and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

Panel E: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed Firms (N = 74,849) – Liability components and convertible/nonconvertible preferred stock classes
Equation (4e)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(COL/CE)_t	0.1833^*** (19.6922)	0.1382^*** (16.4185)	0.0451^*** (0.0002)	0.1461^*** (18.2770)	0.0720^*** (9.1498)	0.0741^*** (0.0000)	0.1544^*** (19.2313)	0.0752^*** (9.4630)	0.0792^*** (0.0000)
Δ(NCOL/CE)_t	0.0604^*** (8.7457)	0.0460^*** (6.9558)	0.0144 (0.1200)	0.0544^*** (8.9930)	0.0380^*** (6.2824)	0.0164^* (0.0503)	0.0511^*** (7.8771)	0.0462^*** (7.4237)	0.0049 (0.5780)
Δ(STD/CE)_t	0.0939^*** (11.9523)	0.0536^*** (7.9362)	0.0403^*** (0.0001)	0.0656^*** (9.1690)	0.0312^*** (4.4922)	0.0344^*** (0.0006)	0.0643^*** (8.8017)	0.0303^*** (4.0800)	0.0340^*** (0.0010)
Δ(NCFL/CE)_t	0.0708^*** (9.0185)	0.0461^*** (6.2525)	0.0247^** (0.0166)	0.0369^*** (5.0868)	0.0336^*** (4.7213)	0.0033 (0.7460)	0.0440^*** (5.9776)	0.0302^*** (4.0105)	0.0138 (0.1780)
Δ(PSC/CE)_t	0.0213^*** (3.1229)	0.0023 (0.4281)	0.0190^** (0.0272)	0.0171^*** (2.8198)	0.0092^* (1.7558)	0.0079 (0.3100)	0.0207^*** (3.4815)	−0.0008 (−0.1525)	0.0215^*** (0.0065)
Δ(PSNC/CE)_t	0.0101^* (1.7333)	−0.0029 (−0.6451)	0.0130^* (0.0780)	0.0098^* (1.9044)	0.0015 (0.3560)	0.0083 (0.2250)	0.0081 (1.5313)	−0.0018 (−0.4661)	0.0099 (0.1350)
Δ(STD_ROA)_t	0.0797^*** (11.3700)	0.0220^*** (4.1818)	0.0577^*** (0.0000)	0.0892^*** (13.7671)	0.0853^*** (16.9944)	0.0039 (0.6330)	0.0788^*** (11.9302)	0.0502^*** (10.0756)	0.0286^*** (0.0005)
Δ(BID_ASK)_t	0.1729^*** (20.1376)	0.1677^*** (22.0161)	0.0052 (0.6450)	0.1736^*** (22.6726)	0.1511^*** (22.7049)	0.0225^** (0.0280)	0.1791^*** (22.6675)	0.1689^*** (24.8135)	0.0102 (0.3280)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.73	2.27		1.73	2.27		1.73	2.27
Adjusted R²	0.271	0.176		0.343	0.249		0.338	0.250
F-value	88.77^***	107.0^***		90.77^***	109.5^***		82.18^***	97.24^***

Panel E: Association of leverage components and idiosyncratic risk – First-difference OLS regression (1986-2016) with lagged levels and fixed effects for size deciles, book to market deciles, industry and year (N = 102,928) – Comparison of financially distressed firms (N = 28,079) to non-distressed Firms (N = 74,849) – Liability components and convertible/nonconvertible preferred stock classes
Equation (4e)
Dependent/Independent variable	ΔIRISK_t			ΔIRISK_t3			ΔIRISK_t5
Dependent/Independent variable	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)	Distressed	Non-distressed	Diff. (p-value)
Δ(COL/CE)_t	0.1833^*** (19.6922)	0.1382^*** (16.4185)	0.0451^*** (0.0002)	0.1461^*** (18.2770)	0.0720^*** (9.1498)	0.0741^*** (0.0000)	0.1544^*** (19.2313)	0.0752^*** (9.4630)	0.0792^*** (0.0000)
Δ(NCOL/CE)_t	0.0604^*** (8.7457)	0.0460^*** (6.9558)	0.0144 (0.1200)	0.0544^*** (8.9930)	0.0380^*** (6.2824)	0.0164^* (0.0503)	0.0511^*** (7.8771)	0.0462^*** (7.4237)	0.0049 (0.5780)
Δ(STD/CE)_t	0.0939^*** (11.9523)	0.0536^*** (7.9362)	0.0403^*** (0.0001)	0.0656^*** (9.1690)	0.0312^*** (4.4922)	0.0344^*** (0.0006)	0.0643^*** (8.8017)	0.0303^*** (4.0800)	0.0340^*** (0.0010)
Δ(NCFL/CE)_t	0.0708^*** (9.0185)	0.0461^*** (6.2525)	0.0247^** (0.0166)	0.0369^*** (5.0868)	0.0336^*** (4.7213)	0.0033 (0.7460)	0.0440^*** (5.9776)	0.0302^*** (4.0105)	0.0138 (0.1780)
Δ(PSC/CE)_t	0.0213^*** (3.1229)	0.0023 (0.4281)	0.0190^** (0.0272)	0.0171^*** (2.8198)	0.0092^* (1.7558)	0.0079 (0.3100)	0.0207^*** (3.4815)	−0.0008 (−0.1525)	0.0215^*** (0.0065)
Δ(PSNC/CE)_t	0.0101^* (1.7333)	−0.0029 (−0.6451)	0.0130^* (0.0780)	0.0098^* (1.9044)	0.0015 (0.3560)	0.0083 (0.2250)	0.0081 (1.5313)	−0.0018 (−0.4661)	0.0099 (0.1350)
Δ(STD_ROA)_t	0.0797^*** (11.3700)	0.0220^*** (4.1818)	0.0577^*** (0.0000)	0.0892^*** (13.7671)	0.0853^*** (16.9944)	0.0039 (0.6330)	0.0788^*** (11.9302)	0.0502^*** (10.0756)	0.0286^*** (0.0005)
Δ(BID_ASK)_t	0.1729^*** (20.1376)	0.1677^*** (22.0161)	0.0052 (0.6450)	0.1736^*** (22.6726)	0.1511^*** (22.7049)	0.0225^** (0.0280)	0.1791^*** (22.6675)	0.1689^*** (24.8135)	0.0102 (0.3280)
Lagged level terms	Included	Included		Included	Included		Included	Included
Industry FE	Included	Included		Included	Included		Included	Included
Size Decile FE	Included	Included		Included	Included		Included	Included
BM Decile FE	Included	Included		Included	Included		Included	Included
Year FE	Included	Included		Included	Included		Included	Included
Maximum VIF	1.73	2.27		1.73	2.27		1.73	2.27
Adjusted R²	0.271	0.176		0.343	0.249		0.338	0.250
F-value	88.77^***	107.0^***		90.77^***	109.5^***		82.18^***	97.24^***

Note(s): Financially distressed firms are distinguished from non-distressed firms by an Altman z-score less than 1.81 (Altman, 1968). For each independent variable, we report the standardized coefficient and the related t-statistic based on the standard error clustered by firm (Petersen, 2009). The p-value (one-tailed) is reported for the difference between standardized coefficients based on a chi-squared test. ^***, ^**, ^*significant at 0.01, 0.05 and 0.10, respectively. Δ signifies the difference in the level of the variable between period t and t−1. Lagged level terms (t−1) of independent variables (excluding dummy variables) are added to control for feedback effects and are not reported for brevity. For brevity, the intercept and the coefficients on industry dummies, firm size dummies, book to market dummies and year dummies are not reported. The maximum variance inflation factor excludes dummy variables and lagged terms. Appendix 2 provides variable definitions

[ViewLarge]

Sharing Unavailable