Financial Flexibility, Corporate Investment and Performance: Evidence from China's Listed Companies

Empirical evidence has shown that many companies keep lower leverage than traditional capital structure theories predict. Recent studies have suggested that the purpose of conservative financial policy is to remain financial flexibility so as to get financing capability for future need. To analyze the value of financial flexibility, we examine the impact of financial flexibility on corporate investment and performance by studying sample firms of China's listed companies. Our GMM estimation results for dynamic panel data models reveal that companies get financial flexibility through keeping low leverage or high cash holdings, and financial flexible firms significantly invest more two or three years after financial flexibility status achieved, and perform better than financial inflexible firms. Our analysis explains why many Chinese companies adopt conservative leverage policy and proves that financial flexibility is very important in the process of corporate management.