Iwan Meier, Yves Bozec and Claude Laurin
The objective of this study is to test whether financial flexibility has value. Using the current financial crisis, the authors investigate whether firms that built up financial…
Abstract
Purpose
The objective of this study is to test whether financial flexibility has value. Using the current financial crisis, the authors investigate whether firms that built up financial flexibility over the years preceding the crisis yield superior performance during the financial crisis.
Design/methodology/approach
Financial flexibility is measured along the following dimensions: cash and cash equivalents, debt (short‐term and total) and net debt. These proxies are measured as an average over the five years prior to the crisis, from September 2002 to August 2007. Firms are then sorted into ten portfolios and monthly stock returns for each portfolio are evaluated over the crisis period from September 2007 to March 2010.
Findings
The authors' results show that high pre‐crisis levels of cash do not seem to have a positive impact on firm value during the crisis. However, the results provide evidence that high pre‐crisis levels of debt had a negative impact on firm value during the latest financial crisis, supporting the hypothesis that financial flexibility has value.
Originality/value
The originality of the authors' approach is to evaluate the value of financial flexibility during a financial crisis. The recent financial crisis offers an ideal test case to evaluate whether financial flexibility has indeed value for the firm.
Details
Keywords
Yves Bozec, Claude Laurin and Iwan Meier
The purpose of this study is to investigate the relationship between dominant shareholders, whose voting rights exceed cash flow rights (excess control), and firms’ cost of…
Abstract
Purpose
The purpose of this study is to investigate the relationship between dominant shareholders, whose voting rights exceed cash flow rights (excess control), and firms’ cost of capital, including both equity capital and debt.
Design/methodology/approach
This research is conducted in Canada over a four-year period from 2002 to 2005 and uses panel data of 155 S&P/TSX firms. The weighted average cost of capital is regressed on excess control using fixed-effect regressions in a two-stage least squares framework.
Findings
The paper finds evidence that the cost of capital increases with excess control. The paper also confirms that for firms incorporated under the less protective Quebec incorporation law the excess control and, therefore, cost of capital is higher than for firms incorporated in the other provinces under the common law regime.
Originality value
Prior work examined the relationship between excess control and firm value, mostly Tobin's Q. By using cost of capital, the study explores another channel through witch excess control may affect firm value.