We propose a novel approach to measure the value that shareholders assign to financial flexibility. In contrast to existing proxies for financial constraints, our measure is market-based, forward-looking and not directly influenced by past financial decisions. We find that firms for which shareholders consider financial flexibility more valuable have lower dividend payouts, prefer share repurchases to dividends, and exhibit lower leverage ratios. Moreover, these firms tend to accumulate more cash. Our analysis contributes to the growing literature on financial flexibility and indicates that— in line with prior survey evidence—financial flexibility considerations shape corporate financial policy.

Financial flexibility, Payout policy, Capital structure, Cash holdings
Financing Policy; Capital and Ownership Structure (jel G32), Payout Policy (jel G35)
dx.doi.org/10.1016/j.jcorpfin.2014.08.004, hdl.handle.net/1765/111787
ERIM Top-Core Articles
Journal of Corporate Finance
Department of Business Economics

Rapp, M.S., Schmid, T, & Urban, D.L. (2014). The value of financial flexibility and corporate financial policy. Journal of Corporate Finance. doi:10.1016/j.jcorpfin.2014.08.004