Financial flexibility, corporate investment and performance: evidence from financial crises

Abstract

This study examines the impact of financial flexibility on the investment and performance of 1,068 East Asian firms over the period 1994-2006. We show that firms can attain financial flexibility, primarily through conservative leverage policies and less commonly by holding large cash balances. Financial flexibility appears to be an important determinant of investment and performance, mainly during the 1997-1998 crisis. In particular, firms that are financially flexible prior to the crisis (i) have a greater ability to take investment opportunities, (ii) rely much less on the availability of internal funds to invest, and (iii) perform better than less flexible firms during the crisis. Our analysis covering the post crisis period does reveal any important investment differentials between flexible and inflexible firms. Finally, we provide evidence that financial flexibility is more likely to play a decisive role in determining corporate investment and performance than traditional measures of financial constraints (e.g. firm size, dividend payout, firm age and business group affiliation) during abnormal periods of the economic cycle.

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

“…According to existing literature, we predict that firms with higher financial flexibilities can achieve better performances. In both samples, the regression coefficient for firm's financial flexibility are positively correlated with its performance, the results show that financial flexibility can improve firm performance, which is Consistent with the prior research (Marchica & Mura, 2010;Arslan et al, 2014).…”

“…Financial flexibility firms can enjoy easier access to external capital markets to meet funding needs arising from unanticipated earnings shortfalls and/or new growth opportunities, and avoid situations that lead to suboptimal investment and poor performance (Arslan et al, 2014). As a result, performances of financially flexible firms should be more stable and better than other firms.…”

“…Many researchers have proved this judgment, Marchica and Mura (2010) find that financial flexibility companies are not only able to invest more but also seem to invest better, and their long-run performance outperform the market. Arslan et al (2014) examine the impact of financial flexibility on the investment and performance of East Asian firms over the period [1994][1995][1996][1997][1998][1999][2000][2001][2002][2003][2004][2005][2006][2007][2008][2009], and the results show firms that are financially flexible prior to this crisis perform better than less flexible firms during the crisis.…”

What We Do not Know about the Ownership Structure of the Largest U. S. Companies?

“…Исследование Global Entrepreneurship Monitor показывает ди-намику отраслевого распределения предпринимателей: на разви-вающейся стадии экономики бо2 льшая доля предпринимателей за-нималась отраслью услуг, тогда как на развитой стадии преобладает бизнес-сервис, поскольку происходит замена капиталоемких про-изводств наукоемкими 5 . Аналитики отмечают, что с 2009 года актив-ность проявляется в технологическом секторе (к 2014 году рост на 7%), но наибольшее поступательное движение наблюдается в секторе инноваций: рост на 17% 6 за этот же период.…”

“…edu/~adamodar/New_Home_Page/datafile/histgr.html/. 5 Global Entrepreneurship Monitor 2014 Adult Population Survey (APS). 6 Global Entrepreneurship Monitor 2014 United States Report.…”