Is Financial Flexibility a Priced Factor in the Stock Market?
31 Pages Posted: 3 Apr 2019
Date Written: May 2019
This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero‐cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.
Keywords: financial flexibility, asset pricing, risk factors
JEL Classification: G11, G12, G31, G32
Suggested Citation: Suggested Citation