We thank Jayant Kale (the editor), David Mauer (the referee), Andre Gygax, and Erik Kole for useful comments.
DOES FINANCIAL FLEXIBILITY REDUCE INVESTMENT DISTORTIONS?
Article first published online: 1 JUN 2012
© 2012 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 35, Issue 2, pages 243–259, Summer 2012
How to Cite
de Jong, A., Verbeek, M. and Verwijmeren, P. (2012), DOES FINANCIAL FLEXIBILITY REDUCE INVESTMENT DISTORTIONS?. Journal of Financial Research, 35: 243–259. doi: 10.1111/j.1475-6803.2012.01316.x
- Issue published online: 1 JUN 2012
- Article first published online: 1 JUN 2012
The average U.S. firm has less leverage than one would expect based on the trade-off between tax shields and bankruptcy costs. We focus on firms’ financial flexibility and examine whether firms preserve debt capacity to reduce investment distortions in the future. We find that firms with high unused debt capacity invest more in future years than do firms with low unused debt capacity. Furthermore, firms that are reluctant to borrow in unconstrained periods are more likely to issue debt in periods in which access to capital markets is more constrained.