Is enterprise risk-taking less sensitive to financial flexibility post COVID-19? Evidence from non-linear patterns

Ahmed Hunjra (), Tanveer Bagh (), Alessia Palma and John W. Goodell

International Review of Financial Analysis, 2024, vol. 95, issue PB

Abstract: We explore the non-linear relationship between financial flexibility and enterprise risk-taking, investigating the non-linear nature of this association across distinct periods: pre-pandemic, post-pandemic, and the overall sample period. We analyze a sample of 2503 Chinese listed firms, segmented into different time phase. Our design allows for an examination of how financial flexibility relates to risk-taking under various economic circumstances. Utilizing a two-step system GMM approach, as expected, we evidence a positive relationship between financial flexibility and risk-taking. However, squared financial flexibility has a negative and significant impact on risk-taking before the pandemic and across the overall period, while insignificant post-pandemic. These results are consistent with a shift towards enterprise risk-taking being less sensitive to levels of financial flexibility during times of excess financial resources. Moreover, we evidence diminishing returns in risk-taking opportunities beyond a specific threshold of financial flexibility, consistent with this association having non-linear dynamics. These findings highlight the crucial role of maintaining a balanced financial approach for fostering healthy firm-level risk-taking behavior.

Keywords: Financial flexibility; Enterprise risk-taking; COVID-19; Chinese listed firms; Dynamic modeling (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003648

DOI: 10.1016/j.irfa.2024.103432

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