The value of financial flexibility and corporate financial policy

Marc Steffen Rapp, Thomas Schmid and Daniel Urban

Journal of Corporate Finance, 2014, vol. 29, issue C, 288-302

Abstract: We propose a novel approach to measure the value that shareholders assign to financial flexibility. In contrast to existing proxies for financial constraints, our measure is market-based, forward-looking and not directly influenced by past financial decisions. We find that firms for which shareholders consider financial flexibility more valuable have lower dividend payouts, prefer share repurchases to dividends, and exhibit lower leverage ratios. Moreover, these firms tend to accumulate more cash. Our analysis contributes to the growing literature on financial flexibility and indicates that—in line with prior survey evidence—financial flexibility considerations shape corporate financial policy.

Keywords: Financial flexibility; Payout policy; Capital structure; Cash holdings (search for similar items in EconPapers)
JEL-codes: G32 G35 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:29:y:2014:i:c:p:288-302

DOI: 10.1016/j.jcorpfin.2014.08.004

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