Inflexibility and Leverage
American Finance Association Meetings 2021
Posted: 7 Nov 2019 Last revised: 7 Apr 2021
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: Suggested Citation