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Is Financial Flexibility a Priced Factor in the Stock Market?

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  • Suresh Kumar Oad Rajput
  • Udomsak Wongchoti
  • Jianguo Chen
  • Robert Faff

Abstract

This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero‐cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.

Suggested Citation

  • Suresh Kumar Oad Rajput & Udomsak Wongchoti & Jianguo Chen & Robert Faff, 2019. "Is Financial Flexibility a Priced Factor in the Stock Market?," The Financial Review, Eastern Finance Association, vol. 54(2), pages 345-375, May.
    • Handle: RePEc:bla:finrev:v:54:y:2019:i:2:p:345-375
    DOI: 10.1111/fire.12170
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    Cited by:

    1. Melvin Jameson & Tao‐Hsien Dolly King & Andrew Prevost, 2021. "Top management incentives and financial flexibility: The case of make‐whole call provisions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 374-404, January.
    2. Soku Byoun, 2021. "Financial flexibility demand and corporate financial decisions," The Financial Review, Eastern Finance Association, vol. 56(3), pages 481-509, August.
    3. Chortareas, Georgios & Noikokyris, Emmanouil, 2021. "Investment, firm-specific uncertainty, and financial flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 25-35.

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