Financial Flexibility: An Overview

Topics: Corporate finance, Finance, Debt Pages: 16 (3946 words) Published: May 20, 2014
CHAPTER 1
INTRODUCTION

1.1 Introduction

Understanding the financial flexibility is needed to make sure we can control our money from being in problem. Other than that, financial flexibility is one of the most important determinants of capital structure. In my research, the act as if the target isn’t important, but what’s really going on is that the target itself is missing important information and managers are more concerned about access to capital over anything else.

Financial flexibility refers to a firm’s ability to access financing at a low cost and respond to unexpected changes in the firm’s cash flows or investment opportunities in a timely manner(Denis, 2011). A survey of CFOs in Graham and Harvey (2001) suggests that financial flexibility is the most important determining factor of corporate capital structure decisions, but flexibility has not been studied as a first-order determinant of corporate financial policies until very recently.

In addition, financial flexibility is a key aspect in the practice of corporate finance, based on Graham and Harvey(2001), Brounen, de Jong and Koedijk(2004) and Bancel and Mittoo(2004). It also documented in several surveys, it outranks traditional factor such as tax benefits, default costs and information asymmetries in their importance for capital structure decisions. A firm is considered to be financially flexible if it is unconstrained in its issuance decision, sufficiently liquid to react to cash flow shocks and able to timely pursue investment opportunities due to an easy access to funds. From an empirical point of view, the measurement of financial flexibility is challenging.

Global financial crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. According by Justine Davies(2014), by September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile and the consumer confidence hit rock bottom as everyone tightened their belts in fear of what could lie ahead. Based on Warwick J.Mekibbin and Andrew Stoeckel (2009), the collapse of Lehman Brothers in September 2008, sent a wave of fear around world financial markets and the banks virtually stopped lending to each other. The risk premium on interbank borrowing rose sharply to 5%, whereas typically it was close to zero. Although authorities scrambled to inject liquidity into financial markets, the damage was done.

On this research, we will focused in financial flexibility and the impact of the global financial crisis in Malaysia that we can see. This research to make everyone knows that our economy not strong and they will have the up and down of the financial. The financial flexibility also effect the income of our country and people who are involve in cash flow or investment, in the corporate finance and the capital structure.

1.2 Problem statements

The research study is entitled “Financial Flexibility and Impact of The Global Crisis”. Financial flexibility is a key aspect in the practice of corporate finance. Financial flexibility refers to a firm’s ability to access financing at a low cost and respond to unexpected changes in the firm’s cash flows or investment opportunities in a timely manner. The global financial crisis of 2008-2009, with its epicenter in the United States, has brought enormous ramifications for the world economy. The study is aim to focus on whether the financial flexibility and impact it to the global financial crisis.

1.3 Research Objective

Financial flexibility refers to a firm’s ability to access financing at a low cost and respond to unexpected changes in the firm’s cash flows or investment opportunities in a timely manner (Denis, 2011). A survey of CFOs in Graham and Harvey (2001) suggests that financial flexibility is the most important determining factor of corporate capital structure...

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Almeida, H., Campello, M., Laranjeira, B. and Weisbenner, S. (2010), “Corporate debt maturity and the real effects of the 2007 credit crisis”, NBER working paper 14990, available at
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Bancel, F. and Mittoo, U.R. (2004), “Cross-country determinants of capital structure choice: a survey of European firms”, Financial Management, Vol. 33, pp. 103-32.
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DeAngelo, H. and DeAngelo, L. (2007), “Capital structure, payout policy and financial flexibility”, USC Marshall School of Business, Working Paper No. FBE 02-06, available at: http://ssrn. com/abstract¼916093
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Graham, J. and Harvey, C. (2001), “The theory and practice of corporate finance: evidence from the field”, Journal of Financial Economics, Vol. 60, pp. 187-243.
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