Does Financial Flexibility foster Investment Efficiency? Evidence from an Emerging Market


  • Md. Rashidul Islam Dongbei University of Finance and Economics
  • Monirul Alam Hossain Bangladesh University
  • Mohammad Shamsu Uddin Dalian University of Technology
  • Dawit Teclemariam Bahta Dongbei University of Finance and Economics



Financial Flexibility, Investment Efficiency, Emerging Economy


This research aims to examine the relationship between financial flexibility and investment efficiency empirically, i.e., how financial flexibility effects suboptimal investments and efficiency. To attain the research objectives, we used panel data for 18 years (2000-2017) obtained from the CSMAR database; and also used the GMM estimation technique for research outcome. Our empirical results reveal that financial flexible firms can reduce the suboptimal investment by increasing investments compared to the inflexible firms and increases the investment efficiency. Also, financially flexible firms generate additional power to borrow external finance by showing a significant positive relationship with current and expected leverage. This research considers China as an emerging economy that is in the transition of being a developed country with a unique set of corporate governance, which ensures the independence of independent directors by providing authority to disclose important board decisions to the public. Besides, the governance system is highly monitored by the government, which in turn reduces and information asymmetry and enact to provide investment efficiency. Thus, the outcome of this research offers several conceptions for researchers and managers, which may be useful for both emerging and advanced countries. The results indicate that financial flexibilities lead to excess debt capacity, and this capacity can be used in the bad time when external financing is challenging to fund profitable projects, and also financial flexibility can be used to exploit lucrative projects and reduce the underinvestment or overinvestment entailing investment effectiveness. Previous research addresses the issue related to cost and benefit, information asymmetry, ownership concentration, and firms’ propensity to financial flexibility. A little research conducted on financial flexibility and investment efficiency in the developed market (in Europe and USA), and thus the issue of and financial flexibility measured in unused debt capacity and investment efficiency, is one of the fundamental research in the emerging economy.


Download data is not yet available.

Author Biographies

Md. Rashidul Islam, Dongbei University of Finance and Economics

School of Accounting, Dongbei University of Finance and Economics, Liaoning Province, Dalian, CHINA

Monirul Alam Hossain, Bangladesh University

Professor  and Chairperson, Department of Business Administration, Bangladesh University, Dhaka, BANGLADESH

Mohammad Shamsu Uddin, Dalian University of Technology

School of Economics and Management, Dalian University of Technology, Dalian 116024, CHINA

Dawit Teclemariam Bahta, Dongbei University of Finance and Economics

School of Business Administration, Dongbei University of Finance and Economics, Liaoning Province, Dalian, CHINA


Al-Najjar, B. & Clark, E. 2017. Corporate Governance And Cash Holdings In Mena: Evidence From Internal And External Governance Practices. Research In International Business And Finance, 39, 1-12.

Almeida, H. & Campello, M. 2007. Financial Constraints, Asset Tangibility, And Corporate Investment. The Review Of Financial Studies, 20, 1429-1460.

Almeida, H., Campello, M., Cunha, I. & Weisbach, M. S. 2014. Corporate Liquidity Management: A Conceptual Framework And Survey. Annu. Rev. Financ. Econ., 6, 135-162.

Arellano, M. & Bond, S. 1991. Some Tests Of Specification For Panel Data: Monte Carlo Evidence And An Application To Employment Equations. The Review Of Economic Studies, 58, 277-297.

Arslan-Ayaydin, Ö., Florackis, C. & Ozkan, A. 2014. Financial Flexibility, Corporate Investment And Performance: Evidence From Financial Crises. Review Of Quantitative Finance And Accounting, 42, 211-250.

Bates, T. W., Kahle, K. M. & Stulz, R. M. 2009. Why Do Us Firms Hold So Much More Cash Than They Used To? The Journal Of Finance, 64, 1985-2021.

Bolton, P., Wang, N. & Yang, J. 2019. Investment Under Uncertainty With Financial Constraints. Journal Of Economic Theory, 184, 104912.

Bonaimé, A. A., Hankins, K. W. & Harford, J. 2013. Financial Flexibility, Risk Management, And Payout Choice. The Review Of Financial Studies, 27, 1074-1101.

Bryman, A. & Cramer, D. 1997. Quantitative Data Analysis With Spss For Windows: A Guide For Social Scientists, Routledge.

Byoun, S. 2007. Financial Flexibility, Leverage, And Firm Size. Waco, Tx. January, 3.

Cherkasova, V. & Kuzmin, E. 2018. Financial Flexibility As An Investment Efficiency Factor In Asian Companies. Gadjah Mada International Journal Of Business, 20, 137.

Cherkasova, V. & Zakharova, E. 2016. Suboptimal Investments And M&A Deals In Emerging Capital Markets. Ekonomski Anali/Economic Annals, 61.

De Jong, A., Verbeek, M. & Verwijmeren, P. 2012. Does Financial Flexibility Reduce Investment Distortions? Journal Of Financial Research, 35, 243-259.

Deangelo, H. & Deangelo, L. 2007. Capital Structure, Payout Policy, And Financial Flexibility. Marshall School Of Business Working Paper No. Fbe, 02-06.

Denis, D. J. & Mckeon, S. B. 2009. Financial Flexibility And Capital Structure Policy: Evidence From Pro-Active Leverage Increases. Unpublished Working Paper, Purdue University.

Denis, D. J. & Mckeon, S. B. 2012. Debt Financing And Financial Flexibility Evidence From Proactive Leverage Increases. The Review Of Financial Studies, 25, 1897-1929.

Estwick, S. 2016. Principal-Principal Agency And Financial Flexibility In Transition Economies. The Journal Of Business Inquiry, 15, 33-54.

Ferrando, A., Marchica, M. T. & Mura, R. 2017. Financial Flexibility And Investment Ability Across The Euro Area And The Uk. European Financial Management, 23, 87-126.

Graham, J. R. & Harvey, C. R. 2001. The Theory And Practice Of Corporate Finance: Evidence From The Field. Journal Of Financial Economics, 60, 187-243.

Han, D. & Zhang, P. 2016. Monetary Policy, Financing Constraints And Investment Efficiency: Evidence From Listed Private Companies Of China. Nankai Business Review International, 7, 80-98.

Hasan, M. S., Rahman, R. A. & Hossain, S. Z. 2014. Monitoring Family Performance: Family Ownership And Corporate Governance Structure In Bangladesh. Procedia-Social And Behavioral Sciences, 145, 103-109.

Islam, M. R., Wang ,Man., And Dewri,Leo Vashkor 2019. Financial Flexibility-A Synthesis Review Of The Literature. International Journal Of Accounting And Financial Reporting, 9, 12.

Jensen, M. C. 1986. Agency Costs Of Free Cash Flow, Corporate Finance, And Takeovers. The American Economic Review, 76, 323-329.

Jensen, M. C. 1994. Self‐Interest, Altruism, Incentives, And Agency Theory. Journal Of Applied Corporate Finance, 7, 40-45.

Jensen, M. C. & Meckling, W. H. 1976. Theory Of The Firm: Managerial Behavior, Agency Costs And Ownership Structure. Journal Of Financial Economics, 3, 305-360.

La Rocca, M., La Rocca, T. & Gerace, D. 2008. A Survey Of The Relation Between Capital Structure And Corporate Strategy. Australasian Accounting, Business And Finance Journal, 2, 1.

Li, K., Lu, L., Mittoo, U. R. & Zhang, Z. 2015. Board Independence, Ownership Concentration And Corporate Performance—Chinese Evidence. International Review Of Financial Analysis, 41, 162-175.

Ma, C.-A. & Jin, Y. 2016. What Drives The Relationship Between Financial Flexibility And Firm Performance: Investment Scale Or Investment Efficiency? Evidence From China. Emerging Markets Finance And Trade, 52, 2043-2055.

Marchica, M. T. & Mura, R. 2010. Financial Flexibility, Investment Ability, And Firm Value: Evidence From Firms With Spare Debt Capacity. Financial Management, 39, 1339-1365.

Mittoo, U. R. & Bancel, F. 2011. Financial Flexibility And The Impact Of The Global Financial Crisis. International Journal Of Managerial Finance.

Modigliani, F. & Miller, M. H. 1963. Corporate Income Taxes And The Cost Of Capital: A Correction. The American Economic Review, 53, 433-443.

Myers, S. C. 1974. Interactions Of Corporate Financing And Investment Decisions—Implications For Capital Budgeting. The Journal Of Finance, 29, 1-25.

Myers, S. C. & Majluf, N. S. 1984. Corporate Financing And Investment Decisions When Firms Have Information That Investors Do Not Have. Journal Of Financial Economics, 13, 187-221.

Nouri, M. & Jafari, S. M. 2016. The Impact Of Financial Flexibility On Investment Efficiency (Over-Investment And Under-Investment) With Respect To Managerial Ownership In The Firms Listed In Tehran Stock Exchange. Icp Business. Economics And Finance, 3, 18-22.

Oded, J. 2019. Payout Policy, Financial Flexibility, And Agency Costs Of Free Cash Flow. Financial Flexibility, And Agency Costs Of Free Cash Flow (January 29, 2019).

Richardson, S. 2006. Over-Investment Of Free Cash Flow. Review Of Accounting Studies, 11, 159-189.

Titman, S., Wei, K. J. & Xie, F. 2009. Capital Investments And Stock Returns In Japan. International Review Of Finance, 9, 111-131.

Yung, K., Li, D. D. & Jian, Y. 2015. The Value Of Corporate Financial Flexibility In Emerging Countries. Journal Of Multinational Financial Management, 32, 25-41.




How to Cite

Islam, M. R. ., Hossain, M. A. ., Uddin, M. S. ., & Bahta, D. T. . (2020). Does Financial Flexibility foster Investment Efficiency? Evidence from an Emerging Market. Asian Business Review, 10(2), 121–136.