The effect of financial flexibility on corporate financial policies and performance: Cross-country evidence

Abstract

The aim of this thesis is to investigate the impact of financial flexibility (FF) on investments and firm value with a comparative analysis between developed and developing countries, giving special emphasis to whether the impact of FF changes between different countries with different levels of development. Moreover, we also have the objective of comprehending the effect of asymmetric information on the association not only between FF and investment, but also between FF and firm value. Using a large database of 4,334 and 1,436 companies from developed and developing countries from Europe, respectively, for the time period between 2000 and 2016; we provide evidence that FF, achieved through conservative leverage policy, enhances the investment level of companies and also positively contributes to firm value. Furthermore, financial flexibility’s impact on both investment and firm value is stronger for developing countries as compared to developed countries. Moreover, we also provide evidence that FF is more significant for companies with more information asymmetries, i.e. for smaller and younger companies and for companies in countries with less credit accessibility and poorer investor protection. On the other hand, using the 2008 global economic downturn as a natural experiment, we demonstrate that financial flexibility lets companies to lower the negative impact of economic downturn on investment. All in all, our results support the hypothesis that FF enhances companies’ investment capability and surges firm value up and finally the impact of financial flexibility is stronger for companies with higher information asymmetries.