Financial Flexibility Across the Euro Area and the UK

We use a large database of more than 685,000 European firms to show that financial flexibility attained through conservative leverage policies is more important for private, small, medium-sized and young firms and for firms in countries with lower access to credit and weaker investor protection. Further, using the recent financial crisis as a natural experiment, we show that financial flexibility status allows companies to reduce the negative impact of liquidity shocks on their investment decisions. Our findings support the hypothesis that financial flexibility relates to companies’ ability to undertake future investment, despite market frictions hampering possible profitable growth opportunities.

Keywords: low leverage, financial flexibility, investment, cross-country analysis

JEL Classification: G31, G32, D92

Suggested Citation: Suggested Citation

Ferrando, Annalisa and Marchica, Maria‐Teresa and Mura, Roberto, Financial Flexibility Across the Euro Area and the UK (January 20, 2014). ECB Working Paper No. 1630, Available at SSRN: https://ssrn.com/abstract=2381833 or http://dx.doi.org/10.2139/ssrn.2381833