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 East Asian firms over the period 1994-2009. We employ a sample of 1,068 firms and place particular emphasis on the periods of the Asian crisis (1997-1998) and the recent credit crisis (2007-2009). The results 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 Asian 1997-1998 crisis. In particular, firms that are financially flexible prior to this 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 credit crisis period of 2007-2009 suggests that some of the advantages of flexible firms towards investing persist but are significantly less pronounced over that period. We also find that the value of financial flexibility is region/country specific, which may be explained by the fact that different regions/countries often adopt different macroeconomic policies and operate in diverse economic/legal environments.

Keywords: Financial Flexibility, Corporate Investment, Liquidity Management, Financial Crisis, Financing Constraints

JEL Classification: G01, G31, G32