Financial flexibility and the Impact of the Global financial Crisis

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Financial flexibility and the impact of the global financial crisis

Evidence from France

Franck Bancel

ESCP Europe, Paris, France, and

Financial flexibility

179

Usha R. Mittoo

University of Manitoba, Winnipeg, Canada

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....