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Financial Flexibility and Managerial Short-Termism

Author

Listed:
  • Yan Gu

    (Fanhai International School of Finance, Fudan University)

  • Qianglong Zhou

    (China Financial Futures Exchange)

  • Kung-Cheng Ho

    (Pearl River Delta Collaborative Innovation Center of Scientific Finance and Industry, Guangdong University of Finance & Economics)

Abstract

Since the financial crisis of 2008, financial flexibility has gradually become a crucial method employed by enterprises worldwide to resist external risks. Based on a sample of Chinese listed companies from 2005 to 2015, this study investigates the impacts of financial flexibility on firms' earnings management. We find that the managerial short-termism of financially flexible enterprises is significantly lower than that of financially inflexible enterprises. This conclusion holds after the endogenous problem is considered, adjusting the threshold of the definition of financial flexibility and alternative proxies of managerial short-termism. Moreover, the effect of financial flexibility significantly reduces earnings management, which is more significant in private enterprises and low-risk industries. In addition, the probability of financially flexible firms selecting one of the Big Four international accounting firms is higher, whereas that of them receiving nonstandard audit opinions and breaking the law is lower. This paper enriches the research on the economic consequences of financial flexibility from the level of corporate governance, and the conclusions have a certain practical significance for a comprehensive understanding of the current problem of deleveraging in China's enterprises.

Suggested Citation

  • Yan Gu & Qianglong Zhou & Kung-Cheng Ho, 2020. "Financial Flexibility and Managerial Short-Termism," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 189-208, May.
    • Handle: RePEc:cuf:journl:y:2020:v:21:i:1:guzhouho
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    References listed on IDEAS

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    Cited by:

    1. Qilong Cao & Meng Ju & Jinglei Li & Changbao Zhong, 2022. "Managerial Myopia and Long-Term Investment: Evidence from China," Sustainability, MDPI, vol. 15(1), pages 1-20, December.
    2. Philip Kotze & Kunofiwa Tsaurai & Godfrey Marozva, 2024. "Financial Flexibility Prevalence Revisited with Evidence from South Africa," JRFM, MDPI, vol. 17(10), pages 1-14, October.
    3. Kung-Cheng Ho & Hung-Yi Huang & Shengnan Liu, 2022. "Information disclosure ratings and managerial short-termism: An empirical investigation of the Chinese stock market," International Entrepreneurship and Management Journal, Springer, vol. 18(1), pages 349-381, March.

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    More about this item

    Keywords

    Financial flexibility; Low leverage; Managerial short-termism; Earnings management; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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