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Value of Financial Flexibility

By:

Gamba Andrea

Material type: Article

ArticleLanguage: ENG Series: ; 63Publication details: Oct 2008 0Edition: 5Description: 2263-2296 PpSubject(s):

Financial Flexibility

DDC classification:

Online resources:

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Summary: We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity.

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Item type	Current library	Call number	Status	Date due	Barcode
Articles	Main Library	Gam (Browse shelf(Opens below))	Available		AR10409

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We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity.

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