Financial Flexibility Demand on Corporate Financial Decisions
59 Pages Posted: 4 Aug 2016 Last revised: 20 Nov 2020
Date Written: November 19, 2020
I develop a hypothesis that predicts nonlinear patterns of leverage and cash holdings over firms' financial flexibility demand stages. The hypothesis also predicts distinctive financing patterns over the financial flexibility demand stages. The empirical results support the hypothesis: flexibility-building firms maintain low leverage by issuing equity in order to raise cash; flexibility-utilizing firms increase debt and use reserved cash to exercise investment options; and flexibility-recharging firms repay debt and increase cash using internal funds. The pronounced nonlinear patterns in financial decisions over the financial flexibility demand stages have important implications for previously documented empirical regularities and for future theoretical considerations.
Keywords: Financial flexibility; Cash holding; Capital structure; Trade-off theory; Pecking-order theory
JEL Classification: JEL Classification: G32 G35
Suggested Citation: Suggested Citation