Financial Flexibility and Investment Ability Across the Euro Area and the UK

We use a very large sample of European private and public firms to show that financial flexibility attained through a conservative leverage policy is more important for private, small‐medium‐sized, and young firms and for firms in countries with less access to credit and weaker investor protection. Further, using the 2007 financial crisis as a natural experiment, we show that a higher degree of financial flexibility allows firms to reduce the negative impact of liquidity shocks on investment. Our findings support the hypothesis that financial flexibility improves companies' ability to undertake future investment, despite market frictions hampering possible growth opportunities.

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

Suggested Citation: Suggested Citation

Ferrando, Annalisa and Marchica, Maria‐Teresa and Mura, Roberto, Financial Flexibility and Investment Ability Across the Euro Area and the UK (January 2017). European Financial Management, Vol. 23, Issue 1, pp. 87-126, 2017, Available at SSRN: https://ssrn.com/abstract=2896446 or http://dx.doi.org/10.1111/eufm.12091