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Article
Publication date: 25 March 2021

Vahab Rostami and Leyla Rezaei

This study aims to track product market competition and financial flexibility on firms’ business strategies.

Abstract

Purpose

This study aims to track product market competition and financial flexibility on firms’ business strategies.

Design/methodology/approach

For this purpose, 187 listed firms on the Tehran Stock Exchange were selected by the systematic elimination for 2012–2018. The hypotheses were examined using the linear regression model. Ittner and Larcker’s (1997) model assesses the business strategy (dependent variable). The Herfindahl–Hirschman index is used to assess the product market competition (independent variable). Finally, the Frank and Goyal’s (2009) model investigates financial flexibility (independent variable).

Findings

The findings indicate that competition in the product market has significantly declined the resort of defensive and invasive business strategies and intensified opportunistic analytical and opportunistic strategies, benefiting from financial flexibility and facilitating defensive and opportunistic adaptation and decreased analytic and invasive strategies. Besides, the product market competition contributes to the firm’s financial flexibility and analytical, opportunistic, invasive and defensive strategies. Most of the studies in the field of business strategy analyzed some factors, such as performance (Zhang, 2016), tax avoidance (Higgins et al., 2015) and share pricing risk (Habib and Hasan, 2017). There is no study to assess the effect of business strategy on product market competition and financial flexibility.

Originality/value

The present study’s findings provide some invaluable concepts for firm managers on the significance of competition in the product market and financial flexibility. Focusing on competition intensity and flexibility level can deal with the board’s ambiguities on market structure and competitive status. The use of profitably competitive investment opportunities leads to selecting the most beneficial strategies, leading to a more efficient allocation of scarce resources and, finally, the enhancement of organizational performance.

Details

Journal of Facilities Management , vol. 19 no. 5
Type: Research Article
ISSN: 1472-5967

Keywords

Article
Publication date: 21 June 2013

Iwan Meier, Yves Bozec and Claude Laurin

The objective of this study is to test whether financial flexibility has value. Using the current financial crisis, the authors investigate whether firms that built up…

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Abstract

Purpose

The objective of this study is to test whether financial flexibility has value. Using the current financial crisis, the authors investigate whether firms that built up financial flexibility over the years preceding the crisis yield superior performance during the financial crisis.

Design/methodology/approach

Financial flexibility is measured along the following dimensions: cash and cash equivalents, debt (short‐term and total) and net debt. These proxies are measured as an average over the five years prior to the crisis, from September 2002 to August 2007. Firms are then sorted into ten portfolios and monthly stock returns for each portfolio are evaluated over the crisis period from September 2007 to March 2010.

Findings

The authors' results show that high pre‐crisis levels of cash do not seem to have a positive impact on firm value during the crisis. However, the results provide evidence that high pre‐crisis levels of debt had a negative impact on firm value during the latest financial crisis, supporting the hypothesis that financial flexibility has value.

Originality/value

The originality of the authors' approach is to evaluate the value of financial flexibility during a financial crisis. The recent financial crisis offers an ideal test case to evaluate whether financial flexibility has indeed value for the firm.

Details

International Journal of Commerce and Management, vol. 23 no. 2
Type: Research Article
ISSN: 1056-9219

Keywords

Article
Publication date: 7 November 2016

Stacey Alicia Estwick

This study examined the attainment and the benefits of financial flexibility in the presence of concentrated ownership in the Caribbean.

Abstract

Purpose

This study examined the attainment and the benefits of financial flexibility in the presence of concentrated ownership in the Caribbean.

Design/methodology/approach

This study used qualitative methodology via the use of case studies.

Findings

Results revealed that liquidity may be considered the most important form of financial flexibility for firms in transitioning economies, due to constrained capital markets. Blockholder firms also focus on liquidity out of a concern for recovering their substantial investment. This study suggested that in addition to an emphasis on liquidity, blockholder owners emphasise professionalism in managing the firm. This professionalism, accompanied by a genuine separation of ownership and control, may be critical in minimising the possibility of misappropriation of surplus liquidity. The study showed that blockholder owned firms may not recognise maximum capital investment benefits because of the use of sub-optimal capital budgeting techniques reflecting their liquidity preference, or pay maximum dividends, opting instead to use dividends as a governance tool. However, the ability to separate ownership from the management of the operations may counteract this, leading to an increased focus on net present value (NPV) maximising projects, and a dividend policy aimed at preserving future financial flexibility.

Research limitations/implications

This study highlights the value of qualitative studies in finance research, by providing a deeper insight into the management of firm financial flexibility, under blockholder ownership. It emphasises the importance of considering liquidity as a critical form of financial flexibility. Furthermore, the study shows that two significant factors in controlling principal–principal (PP) conflict may be the ability to separate ownership from control and the appointment of a professional management team.

Originality/value

This research introduces the variable of PP agency in the study of financial flexibility.

Details

Qualitative Research in Financial Markets, vol. 8 no. 4
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 5 April 2011

Franck Bancel and Usha R. Mittoo

The purpose of this study is to gain some insights into how managers perceive and achieve financial flexibility and its value in coping with the 2008 global financial

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Abstract

Purpose

The purpose of this study is to gain some insights into how managers perceive and achieve financial flexibility and its value in coping with the 2008 global financial crisis. The study focuses on the following questions: What are the sources and measures of financial flexibility? Do financially flexible firms suffer a lower impact from the crisis? Is financial flexibility related to business flexibility? and Is financial flexibility important for the firm's capital structure decision?

Design/methodology/approach

This paper employs two methods: a questionnaire survey and interviews with chief financial officers (CFOs). The results are used to examine the relation between the firm's financial flexibility level and the impact of the global financial crisis on its liquidity, investments, capital structure and business operations. The results are used to analyze the robustness of different financial flexibility measures constructed from the survey data to identify an appropriate financial flexibility measure.

Findings

The main finding is that firms with high financial flexibility suffer lower impact from the crisis. The results show that firms with greater internal financing are likely to have lower leverage, higher cash ratios, and suffer a lower impact from the crisis on their business operations. The analysis indicates that an index based on the firm's leverage, liquidity, and operating ratios, similar to the Altman Z‐score, might be a better financial flexibility measure than long‐term debt ratio. The evidence also suggests that financial flexibility is a part of the firm's business strategy and is important for its capital structure decisions.

Originality/value

A major challenge for researchers is how to measure the firm's financial flexibility level, as it is unobservable and difficult to quantify. The innovation of this paper is to directly ask managers about the firm's financial flexibility, from both internal and external financing, construct several financial flexibility variables based on the survey data, and examine their correlations with the global financial crisis impact, to identify a robust financial flexibility measure. The research also provides unique data to investigate the value of financial flexibility during a severe credit crisis.

Details

International Journal of Managerial Finance, vol. 7 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 5 December 2016

Cathy Xuying Cao and Chongyang Chen

The purpose of this paper is to examine how employee satisfaction affects firm value around the financial crisis.

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Abstract

Purpose

The purpose of this paper is to examine how employee satisfaction affects firm value around the financial crisis.

Design/methodology/approach

The authors use the 2008 financial crisis as exogenous shocks to firms to mitigate endogenous concern that employee satisfaction and firm value can be jointly determined. The authors compare firm value of two groups of firms: the firms on the Fortune magazine’s list of “100 Best Companies to Work For” and matched firms that are not on the list. The authors employ difference-in-difference approaches in the tests.

Findings

The authors find that when the crisis happens, the best companies experience larger decreases in firm value than comparable firms. In addition, such decreases in firm value only exist among the best companies with high financial flexibility. The authors also show that job satisfaction alone does not create firm value during the financial crisis; only when interacted with high financial flexibility, employee satisfaction leads to high firm value. Finally, the authors document that best companies do not have any advantage in the recovery of firm value after the crisis, regardless of their level of financial flexibility.

Research limitations/implications

There is considerable debate on whether job satisfaction leads to performance or performance leads to satisfaction (Luthans, 1998). The authors show that the impact of employee satisfaction on firm value changes over time. The authors also identify a crucial factor that impacts the value-creation of employee satisfaction: financial flexibility. The findings suggest that the ambiguous results documented in prior literature can be due to the different sample periods and the failure to identify the impact of financial flexibility in previous studies.

Practical implications

The findings provide helpful implications to the business community. The evidence suggests that to reap the benefits of employee satisfaction, companies need to manage their financial flexibility to buffer against potential negative shocks while having strong corporate governance mechanism to mitigate agency concerns. Moreover, the study provides an investment recommendation to socially responsible investment (SRI) and suggests that it is better off implementing dynamic SRI investment strategies according to economic condition.

Social implications

The evidence suggests that the economic value of employee satisfaction is related to firms’ financial flexibility and economic conditions.

Originality/value

The authors contribute to the literature by showing that the impact of employee satisfaction on firm value changes over time. The test design not only allows the authors to study the effect of employee satisfaction on firm value at a particular point in time, but also helps the authors examine the variation in the effect over economic cycles. This paper also contributes to the literature on SRI. The authors identify a crucial factor that impacts the value-creation of employee satisfaction: financial flexibility.

Details

Managerial Finance, vol. 42 no. 12
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 31 August 2022

Apoorva Arunachal Hegde, Ajaya Kumar Panda and Venkateshwarlu Masuna

This paper aims to study the leverage adjustment behavior of firms distinguished based on financial flexibility. Financial flexibility is one of the key strengths of the…

Abstract

Purpose

This paper aims to study the leverage adjustment behavior of firms distinguished based on financial flexibility. Financial flexibility is one of the key strengths of the companies to borrow funds for long-term capital investment. The lack of extensive studies in this domain motivates the authors to delve into the significance of financial flexibility in making corporate capital structure decisions.

Design/methodology/approach

The data comprise a combination of firm-specific and macroeconomic variables for firms in eight manufacturing sectors from 2009 to 2020. The authors employ an advance estimator, dynamic panel fraction, on the partial adjustment model to investigate the diverse impact on capital structure's speed of adjustment (SoA) between the financially flexible and financially inflexible firms. Furthermore, the authors utilize the generalized method of moments and panel-corrected standard errors to establish the robustness.

Findings

The empirical analysis reveals that the SoA of financially flexible firms lies between 19.75% and 35.38% and the SoA of financially inflexible firms lies between 11.66% and 25.81%. Due to their conserved debt capabilities, financially flexible firms can rely on leverage to stay near the target whenever they move away from it. Furthermore, financially inflexible firms exhibit a low adjustment speed due to their incompetence to borrow funds to benefit from new growth opportunities. The existence of a target ratio among the studied firms is identified from the positive coefficient of lagged dependent variable, and the relevance of trade-off theory is proved by the quick adjustment speeds in most sectors.

Originality/value

The sectoral distinction in the backdrop of the financial flexibility component adds to the research novelty and managerial implications.

Details

Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 1 February 2008

Antonio J. Verdú‐Jover, José‐María Gómez‐Gras and Francisco J. Lloréns‐Montes

This paper aims to propose a model to assess managerial flexibility and its determinants.

1930

Abstract

Purpose

This paper aims to propose a model to assess managerial flexibility and its determinants.

Design/methodology/approach

The authors perform a literature review to identify the main dimensions of managerial flexibility. Flexibility as a firm capability to co‐align the firm and the business environment permanently is deeply related to the notion of fit. The proposed model integrates different approaches to fit. Based on an empirical, transnational study, the research proposes a model for managerial flexibility.

Findings

Three types of flexibility are measured: managerial flexibility, financial flexibility and metaflexibility. Financial flexibility and metaflexibility determine the degree of managerial flexibility, which in turn has positive implications for performance.

Research limitations/implications

The variables included in the model are not exhaustive. The concept of fit implies a static perspective of flexibility.

Practical implications

The results are useful both for researchers and for practitioners. Researchers can benefit from a review of managerial flexibility and a methodology that combines different approaches to fit: matching, covariation and profile deviation. Practitioners can learn that managerial flexibility, articulated in some managerial practices, has positive effects on performance when they are in line with the requirements of the environment. In order to activate these practices, firms should maintain a commitment to learning capabilities and financial resources.

Originality/value

Three contributions are important for research. First, the paper proposes a model for explaining the nature of managerial flexibility. Second, it shows that flexibility and fit are interrelated concepts and that fit improves the measurability of flexibility. Third, managerial flexibility has positive implications for firm performance.

Details

Industrial Management & Data Systems, vol. 108 no. 1
Type: Research Article
ISSN: 0263-5577

Keywords

Article
Publication date: 13 February 2019

Ajaya Kumar Panda and Swagatika Nanda

The purpose of this paper is to examine the impact of changes in the exchange rate on long-term investment decisions of Indian manufacturing firms at the sector level.

Abstract

Purpose

The purpose of this paper is to examine the impact of changes in the exchange rate on long-term investment decisions of Indian manufacturing firms at the sector level.

Design/methodology/approach

The study is undertaken on a sample of 1,222 firms from six key manufacturing sectors of Indian economy during the period 2000-2016. The non-linear relationship between real exchange rate and long-term investment is studied using the two-step generalized model of moments estimator.

Findings

The study finds a concave (i.e. inverted U-shaped) relationship between the long-term investment and real exchange rate, particularly in case of chemical, construction, machinery and textile sector, in particular, and Indian manufacturing industry as a whole. It implies that investments in these sectors increase with depreciation of real exchange rate up to a point of inflection and subsequent to which it starts decreasing if exchange rate continues to depreciate further. But consumer goods and metal product sectors ensure a convex pattern, which demonstrates that investment is decreasing at the initial stage of depreciation of the exchange rate. The study moves one-step forward in validating this nexus between investment and exchange rate with respect to the price-cost margin and the extent of financial flexibility of firms. It is found that high price cost margin and financial flexibility moderates the adverse impact of exchange rate depreciation and immunizes the long-term investments in the scenario of a weak domestic currency and induce long-term investments.

Research limitations/implications

The study measures the impact of exchange rate changes, but the impact of exchange rate volatility on investment has not been studied, which is absolutely different with different implications.

Practical implications

The study provides a clear guideline to firm managers for using the exchange rate movements in a favorable manner. The findings can be used to ensure sustainable long-term investments with respect to the core competence of firms in terms of price cost margin and financial flexibility at sector level of Indian manufacturing firms.

Originality/value

The study analyzes the non-linear relationship between exchange rate changes and long-term investment behavior of manufacturing firms from six key sectors of India. Further, the study moves one step forward to analyze this nexus under different scenarios of financial flexibility and price cost margin using dynamic panel models.

Details

Management Research Review, vol. 42 no. 2
Type: Research Article
ISSN: 2040-8269

Keywords

Article
Publication date: 15 September 2022

Fernando Angulo-Ruiz, Naveen Donthu, Diego Prior and Josep Rialp-Criado

This study aims to ask whether the funding behaviour of companies is different during a recession. Specifically, the authors study whether firms fund marketing resources…

Abstract

Purpose

This study aims to ask whether the funding behaviour of companies is different during a recession. Specifically, the authors study whether firms fund marketing resources and capabilities with internal or external financing during a recession and under which conditions of strategic financial flexibility debt might be used to fund marketing resources and capabilities in recessions.

Design/methodology/approach

This study estimates empirical models using a newly merged data set covering 17 years, from 2000 to 2016. The authors merge firms’ marketing and financial information from Advertising Age, the American Customer Satisfaction Index, Compustat and the Centre for Research in Security Prices. The sample includes a panel of 653 firm-years of 67 top corporate advertisers.

Findings

The results indicate that firms take recessions as opportunities to be proactive and invest in short- and long-term marketing capabilities, companies with higher strategic financial flexibility relative to their industry peers tend to rely more on debt to fund short- and long-term marketing capabilities during recessions, firms use internal financing to fund their marketing budgets and short-term marketing capabilities in recessionary and non-recessionary periods and firms use internal financing and signals from past stock returns as mechanisms to fund long-term marketing capabilities.

Research limitations/implications

The findings contribute to the body of knowledge on the antecedents of marketing resources and capabilities. The results extend the pecking order theory to include recessions and provide nuances of the financing drivers of resources and capabilities.

Practical implications

Companies should be proactive during recessions and invest in short- and long-term marketing capabilities. When negotiating marketing budgets with chief financial officers, marketing practitioners could suggest the sources to finance specific marketing resources and capabilities. Based on the results of top corporate advertisers, the authors recommend companies to fund marketing capabilities with internal resources (e.g. cash flows, retained earnings), and if cash is not available, companies need to rely on their superior strategic financial flexibility to access long-term debt and fund investments in marketing capabilities. The authors also recommend companies to fund long-term marketing capabilities by re-allocating investments. As well, signals from past performance are an important source to gain access to capital and fund investments in long-term marketing capabilities.

Originality/value

This study provides a more complete picture of the financial antecedents of marketing resources and capabilities in general and during a recession. The authors provide light on the moderating role of strategic financial flexibility during recessions. This study also clarifies the potential signalling of past performance for funding marketing resources and capabilities.

Details

European Journal of Marketing, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0309-0566

Keywords

Article
Publication date: 11 September 2017

Robert M. Cornell, Anne M. Magro and Rick C. Warne

The purpose of this paper is to examine investors’ propensity to litigate when harmful events occur subsequent to accounting choices. Consistent with Culpable Control…

Abstract

Purpose

The purpose of this paper is to examine investors’ propensity to litigate when harmful events occur subsequent to accounting choices. Consistent with Culpable Control Theory, the authors find that investors are more likely to pursue litigation against management when managers are perceived to have more financial reporting flexibility, such as when they apply imprecise, principles-based accounting guidance. Investors are more likely to pursue litigation when they find management more responsible for harmful events, and they find management more responsible for those events when they perceive management to have more reporting flexibility. To provide additional insight, the authors investigate how the relationship between reporting flexibility and assessed manager responsibility is mediated by investors’ perceptions of management’s self-interested behavior. The authors consider monetary and non-monetary motivations for litigation against management such as recouping financial losses and punishing management. The results suggest that recouping financial losses is not the sole motivation for litigation. The authors provide evidence that punishing management is an important non-monetary component of the litigation decision. The results contribute to the limited literature on investor litigation decisions and inform the debate surrounding the potential effects of more principles-based accounting standards.

Design/methodology/approach

The authors test the hypotheses using an experiment with a 2×1 between-subjects design in which the authors manipulate reporting flexibility at two levels by varying the precision of accounting guidance and measure all other variables of interest. Participants are 82 part-time executive MBA program students at a major public university in the USA. Most participants work full-time (94 percent), own or have owned stocks either directly or through retirement plans (84 percent), indicate general investment knowledge (97 percent), and report high levels of familiarity with corporate financial statements, including balance sheets and income statements (92 percent). Thus, the authors conclude that these executive MBA students are reasonable surrogates for investors.

Findings

Consistent with the predictions, perceived management reporting flexibility affects investors’ propensity to pursue litigation against management. The authors find that the assignment of responsibility to management for harmful events such as investor losses, employee job losses, and economic losses suffered by a community mediates the relationship between reporting flexibility and investors’ intention to litigate. The authors also find that the relationship between reporting flexibility and assignment of responsibility to management for harmful events is not direct but instead works through the effect of reporting flexibility on perceived management self-interested behavior. As predicted, assessed management responsibility for the harmful event is positively related to investors’ propensity to litigate against management, and this relation is only partially mediated by investors’ perceptions that the litigation will be successful. This result suggests that the litigation decision is driven at least in part by corporate governance goals such as the desire for retribution or punishment of management. The second experiment provides additional support for the theory that the desire to punish management is an important component of investors’ litigation decisions.

Research limitations/implications

The research makes important contributions to the literature on investor litigation and to the ongoing debate regarding principles- vs rules-based accounting standards. While some archival research addresses the conditions under which securities litigation occurs, little empirical research has directly addressed the investor decision to litigate. The paper provides additional evidence to address the question of why investors litigate. By doing so, the authors add to the debate on the desirability of shifting from more rules-based to more principles-based accounting standards.

Practical implications

The theory tested in this study could be used to design mechanisms to mitigate the differential propensity for investors to litigate under differing accounting regimes. As standard setters discuss a move to more principles-based standards in the USA, some observers have expressed concern that investor litigation will increase. The theory suggests that if the standard-setting body can control perceptions of management reporting flexibility such that investors believe principles-based standards provide no more flexibility than rules-based standards, they can limit an increase in the amount of investor litigation.

Originality/value

The authors contribute to theory by providing evidence regarding why investors desire to pursue litigation against management. The authors find that the assignment of responsibility to management for harmful events mediates the relationship between reporting flexibility and investors’ intention to litigate. The authors also find that the relationship between reporting flexibility and assignment of responsibility to management for harmful events is not direct but instead works through the effect of reporting flexibility on perceived management self-interested behavior. Furthermore, assessed management responsibility for the harmful event is positively related to investors’ propensity to litigate against management, and this relation is only partially mediated by investors’ perceptions that the litigation will be successful. Those findings provide theoretical contributions to the literature.

Details

Journal of Applied Accounting Research, vol. 18 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

1 – 10 of over 46000