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Financial Flexibility, Risk Management, and Payout Choice

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  • Alice Adams Bonaimé
  • Kristine Watson Hankins
  • Jarrad Harford

Abstract

Both risk management and payout decisions affect a firm's financial flexibility—the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and nonfinancial firms. We find that a more flexible distribution, favoring repurchases over dividends, is negatively related to financial hedging within a firm, consistent with financial flexibility in payout decisions and hedging being substitutes. Our findings, which are robust to controlling for the endogeneity of hedging and payout choices, suggest that payout flexibility offers operational hedging benefits.

Suggested Citation

  • Alice Adams Bonaimé & Kristine Watson Hankins & Jarrad Harford, 2014. "Financial Flexibility, Risk Management, and Payout Choice," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1074-1101.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:4:p:1074-1101.
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    File URL: http://hdl.handle.net/10.1093/rfs/hht045
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