Financial flexibility and enterprise entity investment preferences

Zhouding Liu

Finance Research Letters, 2024, vol. 66, issue C

Abstract: With the growing trend of firms investing in financial products rather than physical assets, concerns about losing the industrial basis of the real economy have arisen. This study aims to determine how financial flexibility influences corporate investment decisions in China and how operational risk moderates this relationship. As such, we examine the impact of financial flexibility on the investment preferences of Chinese firms, specifically focusing on A-share listed companies from 2012 to 2021. Employing a theoretical and empirical framework, the research reveals that higher financial flexibility is associated with a lower preference for physical investment. However, business risk significantly mitigates this negative effect, suggesting that firms with higher operational risks are more likely to convert financial flexibility into physical investments to enhance expected returns and manage risks. These findings highlight that the influence of financial flexibility on investment preference is most pronounced in small- and medium-sized companies. This research underscores the importance of rationally utilizing financial flexibility, effective risk management, and differentiated strategies based on firm size to promote sustainable investment and economic growth. The implications extend to policymakers, suggesting the need for supportive measures to guide firms toward increased physical investment and a strengthened national economic basis.

Keywords: Financial flexibility; Corporate entity investment preference; Operational risk; Financial investment (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:66:y:2024:i:c:s154461232400730x

DOI: 10.1016/j.frl.2024.105700

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