DOES FINANCIAL FLEXIBILITY REDUCE INVESTMENT DISTORTIONS? |
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| Authors: | Abe de Jong Marno Verbeek Patrick Verwijmeren |
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| Institution: | 1. Rotterdam School of Management, Erasmus University, the Netherlands, University of Groningen, the Netherlands;2. Rotterdam School of Management, Erasmus University, the Netherlands;3. University Amsterdam, the Netherlands, Duisenberg School of Finance, the Netherlands Tinbergen Institute, the Netherlands, University of Glasgow, United Kingdom |
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| Abstract: | The average U.S. firm has less leverage than one would expect based on the trade‐off between tax shields and bankruptcy costs. We focus on firms’ financial flexibility and examine whether firms preserve debt capacity to reduce investment distortions in the future. We find that firms with high unused debt capacity invest more in future years than do firms with low unused debt capacity. Furthermore, firms that are reluctant to borrow in unconstrained periods are more likely to issue debt in periods in which access to capital markets is more constrained. |
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| Keywords: | G32 |
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