ABSTRACT 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

quoted. This paper tests whether a stock listing leads to more flexibility of debt financing, using a data set of listed and comparably large unlisted companies. The data reveals that listing mainly increases the flexible use of debt financing. The difference between listed and unlisted firms is most

. Finally, firms repurchase stock following poor stock market performance and increase dividends following good performance. These results are consistent with the view that the flexibility inherent in repurchase programs is one reason why they are sometimes used instead of

(Preliminary results. Do not quote without author’s permission. Comments are welcome.) ∗We would like to thank the GAMF. We appreciate the support for this project that was provided by the Hankamer School of Business at Baylor University. Financial Flexibility, Firm Size and Capital Structure We

We derive an e ¢ cient leverage range, and illustrate how the range helps facilitate …nancial exibility and dividend smoothing. The range boundaries originate from discrete jumps in the costs associated with incentive conicts, and evolve with cash ows and investment opportunities in a manner that enables the leverage employed to motivate e ¢ cient investment and compensation choices. Firms with a limited range become …nancially constrained, and face stricter credit terms to mitigate expropriation incentives following poor performance. Our analysis helps explain observed leverage ratios, dividend patterns, and debt composition, and suggests directions for empirical studies.

their firm risk rather than project risk in evaluating new investments. Firms are concerned about maintaining financial flexibility and a good credit rating when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking

This paper studies the interaction of real and financial flexibility and their effects on firm’s investment and financing decisions. We use a system of interdependent dynamic partial adjustment models to capture the effects of flexibility and feedback from firm-specific adjustments towards

through the firm’s informed trade. Because their execution is optional, however, repurchase pro-grams cannot always prevent the waste of free cash. Payout policy is thus determined as a trade-off between eliminating agency problems with dividends and preserving financial flexibility with open

and liquidity holdings. We show that financial constraints significantly alter the standard real options results, with the financial flexibility conferred by internal funds acting as a complement, and at times as a substitute, to the real flexibility given by the optimal timing of investment. We show that: 1

are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory