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Financial flexibility: Do firms prepare for recession?

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  • Ang, James
  • Smedema, Adam
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    Abstract

    We analyze how firms manage their financial flexibility conditional on the expected probability of recession. Using an ex ante measure of future recession, we find that, in the aggregate, firms do not appear to prepare. However, a closer analysis reveals a more nuanced relation. The lack of preparation in aggregate is driven by firms that may be unable to prepare: financially constrained and cash poor firms. We find some evidence that firms able to prepare, unconstrained and cash rich firms, may prepare for future recessions.

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    File URL: http://www.sciencedirect.com/science/article/B6VFK-524WF2Y-1/2/c8d19dabcca2578de0697050bd4f1415
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 17 (2011)
    Issue (Month): 3 (June)
    Pages: 774-787

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    Handle: RePEc:eee:corfin:v:17:y:2011:i:3:p:774-787

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Financial flexibility Corporate cash holdings Recession;

    References

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    Cited by:
    1. Carlos Carreira & Filipe Silva, 2012. "Where Are the Fragilities? The Relationship Between Firms' Financial Constraints, Size, and Age," GEMF Working Papers 2012-12, GEMF - Faculdade de Economia, Universidade de Coimbra.
    2. Mónika Kuti, 2011. "Cash Flow at Risk, Financial Flexibility and Financing Constraint," Public Finance Quarterly, State Audit Office of Hungary, vol. 56(4), pages 505-517.
    3. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series 1630, European Central Bank.
    4. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.

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