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Financial flexibility: Do firms prepare for recession?

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  • Ang, James
  • Smedema, Adam

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.

Suggested Citation

  • Ang, James & Smedema, Adam, 2011. "Financial flexibility: Do firms prepare for recession?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 774-787, June.
  • Handle: RePEc:eee:corfin:v:17:y:2011:i:3:p:774-787
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    Cited by:

    1. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series 1630, European Central Bank.
    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. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
    4. Hirth, Stefan & Viswanatha, Marc, 2011. "Financing constraints, cash-flow risk, and corporate investment," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1496-1509.
    5. Davide Dottori & Giacinto Micucci, 2018. "Corporate liquidity in Italy and its increase in the long recession," Questioni di Economia e Finanza (Occasional Papers) 420, Bank of Italy, Economic Research and International Relations Area.
    6. Carlos Carreira & Filipe Silva, 2012. "Where Are The Fragilities? The Relationship Between Firms' Financial Constraints, Size, And Age," Book Chapters, Institute of Economic Sciences.
    7. Volkov, Nikanor I. & Smith, Garrett C., 2015. "Corporate diversification and firm value during economic downturns," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 160-175.

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