Financial inflexibility and the value premium

Michael Poulsen, Robert Faff*, Stephen Gray

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

8 Citations (Scopus)


This paper tests whether and to what extent the value premium is induced by financial inflexibility. In this context, financial flexibility refers to the ability of a firm to alter investment expenditure to mitigate exogenous shocks, so as to generate a smooth dividend stream. Consistent with a literature that identifies three related sources of inflexibility, we create a composite inflexibility index, based on the proportion of fixed assets and measures of total leverage and financial constraints. A positive relation is documented between inflexibility and the book-to-market ratio, and between the returns of inflexible firms and value firms. However, the value premium retains explanatory power independent of inflexibility, suggesting that it is not a proxy for inflexibility alone.

Original languageEnglish
Pages (from-to)327-344
Number of pages18
JournalInternational Review of Finance
Issue number3
Publication statusPublished - Sept 2013
Externally publishedYes


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