Real Flexibility and Financial Structure: An Empirical Analysis

Abstract

I examine the empirical relation between real flexibility and financial structure. I test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution. I measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment. I find that financial leverage is negatively related to production flexibility but positively related to investment flexibility. This split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually, risk shifting facilitated by production flexibility is intractable.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 111 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.