How to Achieve Financial Flexibility: the Role of Corporate Governance

Financial flexibility can have a profound influence on an organization as well as the global economy. Accordingly, corporate managers, academic scholars, business practitioners, and the government have extensively studied the sources and importance of financial flexibility and how to achieve it. Therefore, the principal objective of this study is to propose a useful approach by focusing on the effects of corporate governance on achieving financial flexibility. To this end, this study considered unbalanced panel data from the years 2007 to 2020, yielding 14,088 firm-year observations. The data is obtained from China Stock Market and the Accounting Research Database (CSMAR). The researcher primarily used fixed-effect ordinary least squares (OLS) and system GMM regression for analysis. This study also detects endogeneity by applying the Durbin–Wu–Hausman test. Furthermore, it controls endogeneity by applying lag financial flexibility as an instrumental variable and by employing the system GMM estimation technique as well as the change and reverse change tests. The empirical findings confirm that the corporate governance index has a significant positive effect on financial flexibility, and considering the individual attributes of corporate governance, the results indicate that internal ownership concentration has a significant positive relationship with financial flexibility, confirming the shareholders monitoring hypothesis of agency costs. However, external ownership concentration shows a significant negative relationship with financial flexibility.