Financial Flexibility, Investment Ability and Firm Value: Evidence from Firms with Spare Debt Capacity

48 Pages Posted: 15 Jun 2009 Last revised: 4 Apr 2010

See all articles by Roberto Mura

Roberto Mura

University of Manchester - Manchester Business School

Maria‐Teresa Marchica

University of Manchester - Alliance Manchester Business School

Date Written: April 1, 2010

Abstract

We demonstrate that a conservative leverage policy directed at maintaining financial flexibility can enhance investment ability. Our analysis reveals that following a period of low leverage, firms make larger capital expenditures and increase abnormal investment. We find that these new investments are financed through new issues of debt. The impact of financial flexibility is both statistically significant and economically sizeable. Further, long run performance tests reveal that financially flexible firms not only invest more, but also invest better. Our results are consistent with the view that financial flexibility in the form of untapped reserves of borrowing power is a crucial missing link in capital structure theory.

Keywords: financial flexibility, investment, low leverage, long-run performance

JEL Classification: G31, G32, D92

Suggested Citation

Mura, Roberto and Marchica, Maria‐Teresa, Financial Flexibility, Investment Ability and Firm Value: Evidence from Firms with Spare Debt Capacity (April 1, 2010). Available at SSRN: https://ssrn.com/abstract=891562 or http://dx.doi.org/10.2139/ssrn.891562

Roberto Mura (Contact Author)

University of Manchester - Manchester Business School ( email )

Crawford House
Oxford Road
Manchester, Lancashire M13 9PL
United Kingdom
+44 (0) 161 275 4023 (Fax)

HOME PAGE: http://www.robertomura.com

Maria‐Teresa Marchica

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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