Financial Flexibility and Capital Structure Decision
50 Pages Posted: 25 Mar 2008 Last revised: 20 Mar 2011
Date Written: March 19, 2011
We examine how the demand for financial flexibility affects firms' capital structure decisions. We find that: developing firms that are in the phase of financial flexibility building have low leverage; growth firms that are in the phase of utilizing financial flexibility to fund growth opportunities have high leverage; finally, mature firms that are in the phase of recharging financial flexibility have moderate leverage. The financial flexibility framework provides explanations for several capital structure "puzzles" raised in the literature, suggesting that financial flexibility can be an important "missing link" in existing capital structure theories.
Keywords: Financial Flexibility, Trade-off theory, Pecking-order theory
JEL Classification: G32
Suggested Citation: Suggested Citation