Financial Flexibility, Risk Management, and Payout Choice
Review of Financial Studies, Forthcoming
51 Pages Posted: 25 Jan 2011 Last revised: 8 Jul 2013
Date Written: July 5, 2013
Both risk management and payout decisions affect a firm’s financial flexibility — the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and nonfinancial firms. We find that a more flexible distribution, favoring repurchases over dividends, is negatively related to financial hedging within a firm, consistent with financial flexibility in payout decisions and hedging being substitutes. Our findings, which are robust to controlling for the endogeneity of hedging and payout choices, suggest that payout flexibility offers operational hedging benefits.
Keywords: Payout policy, risk management, financial flexibility, hedging, repurchases, dividends
JEL Classification: G35, G32
Suggested Citation: Suggested Citation