Title: The effect of financial flexibility on firm's financial leverage

Authors: Akram Chegini; Vahab Bashiri

Addresses: Department of Management and Accounting, Islamic Azad University, Ghazvin, Iran ' Department of Accounting, Imam Khomeini International University, Ghazvin, Iran

Abstract: We empirically examine the impact of financial flexibility on firm's financial leverage. Financial flexibility is measured through five variables including growth opportunities, profitability, effective tax rate, spread and asset liquidity intensity. For this work, data of all companies during the period 2004-2013 are gathered from Tehran Stock Exchange. Our results show that firms with high sales growth, spread and effective tax rate have high financial leverage. Also firms with high profitability have higher asset liquidity intensity in their whole assets composition and therefore these firms tend to have lower financial leverage. We also find that firms with higher profitability have a higher liquidity in their asset composition and lower financial leverage. Also, firms with a higher spread have higher profitability and higher liquidity in their asset composition and keep higher liquidity. This group of firms have lower distress risk. Therefore, short-term investors may consider this group of firms for a lower risk investment.

Keywords: financial flexibility; financial leverage; profitability index; spread.

DOI: 10.1504/EMJM.2017.085875

EuroMed Journal of Management, 2017 Vol.2 No.2, pp.141 - 151

Received: 11 Feb 2017
Accepted: 18 Apr 2017
Published online: 16 Aug 2017 *

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