Does Financial Flexibility Enhance Firm Value? A Comparative Study Between Developed and Emerging Countries

Abstract

This paper investigates the effect of financial flexibility on firm value, on a comparative basis between developed and emerging countries in Europe. Our dataset covers 4,334 companies from 15 developed and 1,436 companies from 6 emerging countries in Europe for the period between 2000 and 2016. First, depending on companies’ maintenance of leverage that is below-predicted levels for a successive number of years, I identify the financially flexible companies in the sample. Second, I examine whether financial flexibility affects firm value. Our results demonstrate that firms’ financial flexibility positively contributes to firm value in all estimations. Furthermore, this study presents unprecedented evidence that the effect of financial flexibility on firm value is more significant for emerging countries when compared to developed countries in Europe. Moreover, I demonstrate for the first time that firm characteristics, including firm size and age, which proxy for asymmetric information within a company, negatively moderate the relationship between flexibility and firm value. Managers, both in developed and in emerging countries, who aim to surge their firm value up, should give importance to the maintenance of financial flexibility in their capital structure decisions. Last, managers of relatively smaller and younger companies should put more emphasis on becoming financially flexible if they want to improve their firms’ value.

The nonlinear relationship between financial flexibility and enterprise risk-taking during the COVID-19 pandemic in Taiwan?s semiconductor industry

“…Academics empirically explain underperforming capital structure theories, citing the propensity of firms to want to maintain FF as additional borrowing capacity (Bilyay-Erdogan, 2020;DeAngelo & DeAngelo, 2007;Denis & McKeon, 2012;Gamba & Triantis, 2008;Marchica & Mura, 2010). Thus, the concept of FF provides an explanation for the dilemmas raised in the capital structure literature, suggesting that FF can constitute an important "missing link" that links the propositions of existing capital structure theories to the observational behavior of firms (Bilyay-Erdogan, 2020).…”

Convex-concave effect of financial flexibility on hospitality performance: quantile regression approach

“…The literature addressing the FF-EP relationship is still inconclusive. While one argument suggests a positive FF-EP nexus (Al-Slehat, 2019;Arslan-Ayaydin et al, 2014;Bilyay-Erdogan, 2020;Ma and Jin, 2016), other states that increased FF can cause over investment and low FF can lead to insufficient investment (Agha and Faff, 2014). A third viewpoint focuses on the nonlinear FF-EP relationship, with several articles reporting it as concave (inverted Ushaped) (Gu and Yuan, 2020;Yi, 2020).…”

Financial Flexibility and Health Sector Firm Performance in ASEAN-5 Countries: Moderate Role of Directors with MD Degree

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