4 October 2019
Professor George Skiadopoulos wrote an article in CFO Magazine about his recent research on financial flexibility as a determinant of the firm’s capital structure. Financial flexibility is defined as the company’s ability to take advantage of new investment opportunities as they come along, or sustain ongoing projects, via borrowing. The research tested and verified a main prediction of the financial flexibility paradigm: that manager’s expectations about future company-specific investment shocks, proxied by information extracted from equity options, affect a company’s leverage. It has also revealed that expectations for both small and large investment shocks - as captured by expectations for small and big movements in company stock prices - are more important to managers in setting capital structures than standard determinants of leverage, such as profitability and size. Moreover, it documents that the leverage of small and financially constrained companies is far more sensitive to expectations for shocks than that of big and financially unconstrained firms, as predicted by the financial flexibility paradigm.
This research is conducted with Dr. Costas Lambrinoudakis (Leeds University Business School, University of Leeds) and Mr Konstantinos Gkionis (PhD student, School of Economics and Finance, Queen Mary University of London), and it is published as a lead article in the Journal of Banking and Finance. CFO Magazine is a monthly magazine and it is the leading media brand in the United States aimed at CFOs.