The impact of financial flexibility on capital structure decisions: Some empirical evidence

Pendar, M.; Tayar, H.; Karimeh, S.

Abstract: This paper presents an empirical investigation to study the effect of financial flexibility on capital structure decisions on selected firms listed in Tehran Stock Exchange over the period 2006-2018. The results indicate that the cash value of the previous years had no meaningful relationship with the current year's financial leverage, which suggests that flexibility in previous years could not explain the financial leverage of the coming years and financial leverage of companies changes did not occur based on the past years performance. When the ultimate value of financial flexibility is high, the impact of different variables, for example, profits, depreciation, and depreciation costs, fixed assets, etc., on leverage is of little importance, with a slight change in leverage. Companies with a high final value of financial flexibility are willing to maintain their current debt capacities, but it is significantly possible that they target deliberate or temporary deviations from their leverage ratios.

How to cite this paper

 Pendar, M., Tayar, H & Karimeh, S. (2019). The impact of financial flexibility on capital structure decisions: Some empirical evidence.Management Science Letters , 9(1), 133-138.

References

Baker, M., & Wurgler, J. (2002). Market timing and capital structure. The Journal of Finance, 57(1), 1-32.
Byoun, S. (2007). Financial flexibility, leverage, and firm size. Waco, TX. January, 3.
Campbell, J. Y. (1987). Stock returns and the term structure. Journal of Financial Economics, 18(2), 373-399.
Clark, B. J. (2010). The impact of financial flexibility on capital structure decisions: some empirical evi-dence.
DeAngelo, H., DeAngelo, L., & Skinner, D. J. (2009). Corporate payout policy. Foundations and Trends® in Finance, 3(2–3), 95-287.
Faulkender, M., & Wang, R. (2006). Corporate financial policy and the value of cash. The Journal of Finance, 61(4), 1957-1990.
Hamada, R. S. (1972). The effect of the firm's capital structure on the systematic risk of common stocks. The journal of finance, 27(2), 435-452.
Harris, M., & Raviv, A. (1991). The theory of capital structure. The Journal of Finance, 46(1), 297-355.
Heston, S. L., Rouwenhorst, K. G., & Wessels, R. E. (1995). The structure of international stock returns and the integration of capital markets. Journal of Empirical Finance, 2(3), 173-197.
Masulis, R. W. (1983). The impact of capital structure change on firm value: Some estimates. The Jour-nal of Finance, 38(1), 107-126.
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574-592.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
Pavlov, A., Steiner, E., & Wachter, S. (2018). REIT capital structure choices: Preparation matters. Real Estate Economics, 46(1), 160-209.
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Fi-nance, 43(1), 1-19.
Welch, I. (2004). Capital structure and stock returns. Journal of Political Economy, 112(1), 106-131.
Yang, C. C., Lee, C. F., Gu, Y. X., & Lee, Y. W. (2010). Co-determination of capital structure and stock returns—A LISREL approach: An empirical test of Taiwan stock markets. The Quarterly Re-view of Economics and Finance, 50(2), 222-233.