Financial Flexibility and Economic Policy Uncertainty: Evidence from Firm Behavior and Firm Value

Journal of Corporate Accounting & Finance, Forthcoming

31 Pages Posted: 7 Jul 2022

See all articles by Hamed Yousefi

Hamed Yousefi

Drew University; Old Dominion University - Finance

Kenneth Yung

Old Dominion University - Finance

Date Written: June 27, 2022

Abstract

Economic policy uncertainty imposes a non-diversifiable risk on the firm. Our results show that financial flexibility is a formidable tool for firms in confronting economic policy uncertainty. Researchers have long considered financial flexibility a missing link in the literature as actual firm leverage is below the level predicted by traditional models. This study provides evidence that financial flexibility is valuable for firms. First, we find that financial flexibility is able to mitigate the negative relation between economic policy uncertainty and firm risk-taking activity. Second, financial flexibility moderates the negative effect of EPU on equity payouts. Third, our results show that financial flexibility enhances firm value in the face of economic policy uncertainty.

Keywords: Financial flexibility, Economic policy uncertainty, Unused debt capacity, Risk-taking activity, Equity payouts, Firm value, Exogenous shocks

Suggested Citation

Yousefi, Hamed and Yung, Kenneth, Financial Flexibility and Economic Policy Uncertainty: Evidence from Firm Behavior and Firm Value (June 27, 2022). Journal of Corporate Accounting & Finance, Forthcoming , Available at SSRN: https://ssrn.com/abstract=4148027

Hamed Yousefi (Contact Author)

Drew University

Madison, NJ 07940
United States

Old Dominion University - Finance ( email )

Norfolk, VA 23529-0222
United States

Kenneth Yung

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3573 (Phone)

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