Inflexibility and Leverage

American Finance Association Meetings 2021

Posted: 7 Nov 2019 Last revised: 7 Apr 2021

See all articles by Lifeng Gu

Lifeng Gu

The University of Hong Kong

Dirk Hackbarth

Boston University - Department of Finance & Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Tong Li

The University of Hong Kong

Date Written: December 3, 2017


Firms' inflexibility to adjust their scale persistently explains capital structure variations in a comprehensive sample and randomly-selected sub-samples. Higher inflexibility leads to lower financial leverage, potentially due to higher default risk and lower value of tax shields. Contraction inflexibility determines leverage more than expansion inflexibility. Moreover, inflexibility explains financial leverage on top of operating leverage variability and cash flow variability. Interestingly, the substitution effect between financial and operating leverage is much weaker among flexible firms. In addition, inflexible firms increase leverage more than flexible firms following a positive credit supply shock, which supports our main findings.

Keywords: Capital Structure, Inflexibility, Distress Risk, Physical and human capital

JEL Classification: G32, G33

Suggested Citation

Gu, Lifeng and Hackbarth, Dirk and Li, Tong, Inflexibility and Leverage (December 3, 2017). American Finance Association Meetings 2021, Available at SSRN: or

Dirk Hackbarth

Boston University - Department of Finance & Economics ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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

Tong Li

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK

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