Investment, firm-specific uncertainty, and financial flexibility

Georgios Chortareas and Emmanouil Noikokyris

Journal of Economic Behavior & Organization, 2021, vol. 192, issue C, 25-35

Abstract: We study how financial flexibility impacts on firm's investment decisions under uncertainty. We use a comprehensive dataset covering US firms for the period 1983–2019. We develop a baseline model of investment under uncertainty and characterize the bindingness of financial constraints. We then use this model to explore firms’ investment responses under uncertainty in the presence of financial constraints under different assumptions regarding the value they assign to financial flexibility. Our results point to a negative uncertainty-investment relationship for constrained firms, withstanding the impact of the value of financial flexibility on this relationship. This negative relationship, however, is less pronounced when the value of financial flexibility is higher (especially for younger financially constrained firms).

Keywords: Corporate investment; Uncertainty; Financial constraints; Financial flexibility (search for similar items in EconPapers)
JEL-codes: D81 E22 G31 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:192:y:2021:i:c:p:25-35

DOI: 10.1016/j.jebo.2021.09.042

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