The Value of Financial Flexibility

57 Pages Posted: 6 Mar 2005

See all articles by Andrea Gamba

Andrea Gamba

University of Warwick - Finance Group

Alexander J. Triantis

University of Maryland - Robert H. Smith School of Business

Abstract

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates which determine the effective cost of holding cash, the firm's growth potential and its maturity, and the reversibility of capital. Through simulations, we demonstrate that firms that face financing frictions should simultaneously borrow and lend, and we examine the nature of the dynamic debt and liquidity policies and the value associated with corporate liquidity.

Keywords: Financial flexibility, dynamic capital structure, real options, corporate liquidity

JEL Classification: G31, G32, G35, E22

Suggested Citation

Gamba, Andrea and Triantis, Alexander J., The Value of Financial Flexibility. Journal of Finance, Forthcoming; AFA 2006 Boston Meetings Paper; WBS Finance Group Research Paper No. 42. Available at SSRN: https://ssrn.com/abstract=677086

Andrea Gamba

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Alexander J. Triantis (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-2246 (Phone)
301-314-9157 (Fax)

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