Work

Inflexibility and Leverage

Year: 2026

Type: article

Abstract: Firms' inflexibility to adjust their scale persistently explains capital structure variations in a comprehensive sample and randomly-selected sub-samples. Higher inflexibility leads to lower financial leverage, potentially due to higher default risk and lower value of tax shields. Contraction inflexibility determines leverage more than expansion inflexibility. Moreover, inflexibility explains financial leverage on top of operating leverage variability and cash flow variability. Interestingly, the substitution effect between financial and operating leverage is much weaker among flexible firms. In addition, inflexible firms increase leverage more than flexible firms following a positive credit supply shock, which supports our main findings.

Source: Management Science

DOI: 10.1287/mnsc.2024.08672

Authors: Lifeng Gu, Dirk Hackbarth, Yuxin Luo

Institutions: University of Illinois Urbana-Champaign, Yeshiva University, University of Hong Kong, Boston University, European Corporate Governance Institute, Centre for Economic Policy Research, Renmin University of China

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2948460960

FWCI:

Cites: 63

Cited by: 12

Related to: 10