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Receptivity of capital structure with financial flexibility: A study on manufacturing firms

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  • Ajaya Kumar Panda
  • Swagatika Nanda
  • Apoorva Arunachal Hegde
  • Akhilesh Kumar Kamalakant Yadav

Abstract

The purpose of this paper is to empirically investigate the static capital structure decisions' dynamic responses due to shocks and its relative sensitivity in the presence of financial flexibility. To capture this, we use Panel Corrected Standard Error (PCSE) models and Panel Vector Autoregression (Panel‐VAR) models on the sample of 2,094 listed Indian Manufacturing firms from 2009 to 2019. The empirical findings demonstrate substantial difference in the dynamic responses of capital structure under the conditions of shocks given to its key determinants, with and without financial flexibility. Debt ratio of financially flexible firms reacts positively to asset tangibility and size whereas it reacts negatively to growth opportunity, non‐debt tax shield and profitability. These findings may assist firm managers and policy makers in gauging the limitations associated with leveraging their debt structure on the virtue of being financially flexible.

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  • Ajaya Kumar Panda & Swagatika Nanda & Apoorva Arunachal Hegde & Akhilesh Kumar Kamalakant Yadav, 2023. "Receptivity of capital structure with financial flexibility: A study on manufacturing firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1981-1993, April.
  • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:2:p:1981-1993
    DOI: 10.1002/ijfe.2521
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    2. Chen, Qianqian, 2024. "From concept to capital: Investigating the influence of green innovation on equity financing in BRICS economies," International Review of Financial Analysis, Elsevier, vol. 93(C).
    3. Hu, Jiamin & Li, Kailun & Xia, Yifei & Zhang, Jianing, 2023. "Gender diversity and financial flexibility: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).

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