Financial Leverage and Stock Price Crash Risk: The Role of Growth in Chinese Firms

ABSTRACT This study investigates the effect of financial leverage on stock price crash risk using firm‐level panel data from Chinese firms. Our findings reveal a significantly negative relationship between financial leverage and crash risk, challenging the prevailing literature that often reports a positive association. This result is robust across various endogeneity tests and sensitivity analyses. We identify firm growth as a key channel through which financial leverage is positively linked to crash risk. Heterogeneity analysis further reveals that the negative impact of financial leverage on crash risk is amplified in firms with larger size, higher profitability, greater financialisation or more concentrated institutional ownership. Notably, we also find that a non‐linear relationship between leverage and crash risk exists in specific sectors—such as services, education, health and culture. This underscores the necessity for a tailored approach to understanding leverage dynamics within different industry contexts.