Real Flexibility and Financial Structure: An Empirical Analysis
Year: 2003
Type: article
Abstract: I examine the empirical relation between real flexibility and financial structure. I test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution. I measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment. I find that financial leverage is negatively related to production flexibility but positively related to investment flexibility. This split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually, risk shifting facilitated by production flexibility is intractable.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhg022
Author: Peter MacKay
Institution: Southern Methodist University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1515944725