Is Financial Flexibility a Priced Factor in the Stock Market?

Suresh Kumar Oad Rajput, Udomsak Wongchoti*, Jianguo Chen, Robert Faff

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)

Abstract

This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero-cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.

Original languageEnglish
Pages (from-to)345-375
Number of pages31
JournalFinancial Review
Volume54
Issue number2
DOIs
Publication statusPublished - May 2019
Externally publishedYes

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