Financial Flexibility, Risk Management, and Payout Choice

Review of Financial Studies, Forthcoming

51 Pages Posted: 25 Jan 2011 Last revised: 8 Jul 2013

See all articles by Alice A. Bonaime

Alice A. Bonaime

University of Arizona

Kristine Watson Hankins

University of Kentucky

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

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

Bonaime, Alice A. and Hankins, Kristine Watson and Harford, Jarrad, Financial Flexibility, Risk Management, and Payout Choice (July 5, 2013). Review of Financial Studies, Forthcoming, Available at SSRN: or

Alice A. Bonaime

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

Kristine Watson Hankins

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States

Jarrad Harford (Contact Author)

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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