Is Financial Flexibility a Priced Factor in the Stock Market?. Issue 2 (2nd April 2019)

• Record Type: Journal Article
• Authors: Oad Rajput, Suresh Kumar; Wongchoti, Udomsak; Chen, Jianguo; Faff, Robert
• Is Part Of: Financial review. Volume 54:Issue 2(2019)
• Page Start: 345
• Page End: 375
• Publication Date: 2019-04-02
• Subjects: financial flexibility -- asset pricing -- risk factors -- G11 -- G12 -- G31 -- G32; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1111/fire.12170
• Languages: English
• ISSNs: 0732-8516

Abstract

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.