Financial Flexibility Across the Euro Area and the UK

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AcknowledgementsWe would like to thank the participants of the internal seminar at the European Central Bank (ECB) and at the Eastern Finance Association Meeting 2013. We are also thankful to an anonymous referee for useful comments. This research was conducted while Marchica and Mura were visiting the ECB, whose hospitality and support are gratefully acknowledged. The views expressed in this paper only reflect those of the authors and should not be attributed to the ECB. Annalisa Ferrando (corresponding author)European Central Bank; e-mail: annalisa.ferrando@ecb.int Maria-Teresa Marchica University of ManchesterRoberto Mura University of Manchester 1 AbstractWe use a large database of more than 685,000 European firms to show that financial flexibility attained through conservative leverage policies is more important for private, small, medium-sized and young firms and for firms in countries with lower access to credit and weaker investor protection. Further, using the recent financial crisis as a natural experiment, we show that financial flexibility status allows companies to reduce the negative impact of liquidity shocks on their investment decisions. Our findings support the hypothesis that financial flexibility relates to companies' ability to undertake future investment, despite market frictions hampering possible profitable growth opportunities. JEL Classification: G31, G32, D92Keywords: low leverage, financial flexibility, investment, cross-country analysis 2 Non-technical summaryIn an environment where capital markets are imperfect and the cost of external financing increases, companies may implement a conservative leverage policy to maintain "substantial reserves of untapped borrowing power" as pointed out by Modigliani and Miller (1963). This may allow them to access the capital markets in the event of positive shocks to their investment opportunity set.The purpose of our study is twofold. First, we investigate how a conservative debt policy aimed at maintaining financial flexibility can enhance corporate investment ability. Second, we study the value of financial flexibility across a very heterogeneous sample of both publicly traded and privately held firms that vary substantially in size, age, and quality of institutional settings.Our analysis is based on a rich database of more than 685,000 firms from eight euro area countries and the UK. We first identify financially flexible firms (FF) as those that...

Multiple market imperfections, firm profitability and investment

“…The median euro area firms' operating profits is 27 % of their fixed assets, where Finnish and French firms show the highest level of profitability, while Portuguese and Spanish the lowest. These figures are in line with those documented by Ferrando et al (2014) for the same countries. Profitability and investment rates (I/K) are positively correlated, ranking countries in the same order with the exception of Finland, for which the median investment rate is relatively low with respect to previous studies.…”

“…It further harmonizes the financial accounts to allow cross-country comparisons. There are several studies that have analyzed the limitations, but also the benefits of the Amadeus database Ferrando et al (2014). For instance, although Amadeus includes companies regardless of their size, limited coverage may still occur because the degree of company accounts filing and publication requirements differ between countries.…”

Do SMEs Benefit from Unconventional Monetary Policy and How? Microevidence from the Eurozone

“…Empirical evidence suggests that given their high reliance on bank credit (Berger and Udell , Ferrando, Marchica, and Mura ), SMEs are particularly likely to experience funding shocks when banks adjust their loan portfolios in response to shocks to their balance sheets (Duygan‐Bump, Levkov, and Montoriol‐Garriga ).…”

Firm’s Financial Flexibility: Driving Factors, Flexibility Degree and Economic Results: A Comparison of America and China

“…Relative researches support this view that firms can sacrifice borrowing today to enhance their ability to seize better growth opportunities in the future (Marchica & Mura, 2010), and firms with more financial flexibility have higher future investment ability than firms with less financial flexibility (Jong et al, 2012;Denis & McKeon, 2012;Marchica & Mura, 2010). Ferrando et al (2013) go a step further to reveal that an average company that maintains a low leverage policy for at least three years can increase its capital expenditure by around 22.6%.…”