An Empirical Study On Corporate Finance Behavior And Financial Flexibility Under Uncertain Environment

With the deepening global economic integration, the internal and external business environment which firms faced is becoming more complicated. The traditional rigid financial management has been unable to adapt to the increasing environmental uncertainty. Firms must keep moderate financial flexibility, in order to achieve good business performances and have good prospects.Financial flexibility refers to a firm’s ability to quickly respond to uncertain changes in environment and access financing at a low cost. Firms with high level of financial flexibility have more financing capacity, and can grasp the good investment opportunities. In this paper, we empirically test the impact of financial flexibility on corporate finance behavior on a large sample of Chinese Shanghai and Shenzhen A-share listed firms from2005to2012. We measure financial flexibility considering the leverage and cash holdings policies of firms in the pre crisis period(2005-2006),while we test the relationship between financial flexibility and corporate finance behavior before the crisis (2005-2006),during the crisis (2007-2009) and after the crisis(2010-2012).In this paper we find that firms with lower leverage before the crisis have high debt financing capacity during the crisis, they can raise more external financing and debt financing; firms with higher cash holdings before the crisis raise fewer external financing and make better use of their cash to invest in the financial crisis. We also find that cash flows have negative impact on external financing, and current ratio, firm size, leverage, profitability, investment have positive impact on external financing; leverage, cash flows, profitability, cash holdings have negative impact on debt financing, and investment, current ratio, firm size have positive impact on debt financing.Finally, we put forward some suggestions about how to obtain and keep financial flexibility: On one hand, the firms should keep proper financial flexibility and keep their cash holdings and leverage in the industry average. On the other hand, firms can obtain financial flexibility through the use of OPM strategy, regular disposal of idle assets, credit evaluation improving, group development, diversification of financing.