The average U.S. firm has less leverage than one would expect based on the trade-off between tax shields and bankruptcy costs. We focus on firms' financial flexibility and examine whether firms preserve debt capacity to reduce investment distortions in the future. We find that firms with high unused debt capacity invest more in future years than do firms with low unused debt capacity. Furthermore, firms that are reluctant to borrow in unconstrained periods are more likely to issue debt in periods in which access to capital markets is more constrained.

Additional Metadata
JEL Financing Policy; Capital and Ownership Structure (jel G32)
Persistent URL,
Series ERIM Article Series (EAS)
Journal The Journal of Financial Research
de Jong, A, Verbeek, M.J.C.M, & Verwijmeren, P. (2012). Does financial flexibility reduce investment distortions?. The Journal of Financial Research, 35(2), 243–259. doi:10.1111/j.1475-6803.2012.01316.x