Financial Flexibility Demand on Corporate Financial Decisions

Abstract

Financial flexibility is a firm's ability to deploy its financial resources to meet future financing needs. Flexibility-building firms' financial decisions are geared toward building up financial flexibility --- maintain low leverage by issuing equity in order to raise cash. As firms progress and start making investments, they utilize their financial resources --- flexibility-utilizing firms increase debt and use reserved cash in order to exercise investment options. As more cash flows are generated and investment opportunities diminish, firms recharge their financial flexibility by repaying debt and increasing cash using internal funds. The findings have important implications for previously documented empirical regularities.