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Investment, firm-specific uncertainty, and financial flexibility

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  • Chortareas, Georgios
  • Noikokyris, Emmanouil

Abstract

We study how financial flexibility impacts on firm's investment decisions under uncertainty. We use a comprehensive dataset covering US firms for the period 1983–2019. We develop a baseline model of investment under uncertainty and characterize the bindingness of financial constraints. We then use this model to explore firms’ investment responses under uncertainty in the presence of financial constraints under different assumptions regarding the value they assign to financial flexibility. Our results point to a negative uncertainty-investment relationship for constrained firms, withstanding the impact of the value of financial flexibility on this relationship. This negative relationship, however, is less pronounced when the value of financial flexibility is higher (especially for younger financially constrained firms).

Suggested Citation

  • Chortareas, Georgios & Noikokyris, Emmanouil, 2021. "Investment, firm-specific uncertainty, and financial flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 25-35.
    • Handle: RePEc:eee:jeborg:v:192:y:2021:i:c:p:25-35
    DOI: 10.1016/j.jebo.2021.09.042
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    More about this item

    Keywords

    Corporate investment; Uncertainty; Financial constraints; Financial flexibility;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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