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Financial flexibility demand and corporate financial decisions

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  • Soku Byoun

Abstract

I develop a hypothesis that predicts nonlinear patterns of leverage and cash holdings over firms' financial flexibility (FF) demand stages. The hypothesis also predicts distinctive financing patterns over the FF demand stages. The empirical results support the hypothesis: Flexibility‐building firms maintain low leverage by issuing equity in order to raise cash; flexibility‐utilizing firms increase debt and use reserved cash to exercise investment options; and flexibility‐recharging firms repay debt and increase cash using internal funds. The pronounced nonlinear patterns in financial decisions over the FF demand stages have important implications for previously documented empirical regularities and for future theoretical considerations.

Suggested Citation

  • Soku Byoun, 2021. "Financial flexibility demand and corporate financial decisions," The Financial Review, Eastern Finance Association, vol. 56(3), pages 481-509, August.
    • Handle: RePEc:bla:finrev:v:56:y:2021:i:3:p:481-509
    DOI: 10.1111/fire.12258
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    2. Luis García‐Feijóo & Benjamin A. Jansen, 2023. "International evidence on the association of leverage with stock returns and the value premium," The Financial Review, Eastern Finance Association, vol. 58(2), pages 315-341, May.

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