Financial Flexibility, Corporate Investment and Performance: Evidence from Financial Crises

43 Pages Posted: 19 Aug 2008 Last revised: 28 Jan 2014

See all articles by Özgür Arslan-Ayaydin

Özgür Arslan-Ayaydin

University of Illinois at Chicago - Department of Finance

Chris Florackis

University of Liverpool (UK)

Aydin Ozkan

Hull University Business School (HUBS)

Date Written: October 2, 2012

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

Suggested Citation

Arslan-Ayaydin, Özgür and Florackis, Chris and Ozkan, Aydin, Financial Flexibility, Corporate Investment and Performance: Evidence from Financial Crises (October 2, 2012). Review of Quantitative Finance and Accounting, Vol. 42, pp. 211-250, 2014. Available at SSRN: https://ssrn.com/abstract=1234682 or http://dx.doi.org/10.2139/ssrn.1234682

Özgür Arslan-Ayaydin

University of Illinois at Chicago - Department of Finance ( email )

601 South Morgan
University Hall Room:2416
Chicago, IL Illinois 60607
United States

Chris Florackis (Contact Author)

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Aydin Ozkan

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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