Quantification of financial flexibility and its effects on investment and value in Latin American firms

Abstract

This research introduced a newfangled and continuous calculation for unused debt capacity as a ratio (UDC), which allowed developing and assessing the financial slack ratio (FSR) as a new proxy of FF. FSR combined the cash holding and unused debt capacity as sources of FF because the firms can independently develop their leverage and cash policies. This study tested the effects of FSR on investment and value for Latin American companies during crises (2008-2009 and 2014-2016) and non-crisis periods (2005-2007 and 2010-2013). The outcomes showed that FSR had positive effects on investment and value of firms, reduced the sensitivity of investment to cash flow, and evinced that firms with higher FSR experienced a lower decreasing on their value than firms with lower FSR during crises. This empirical evidence validated that FSR is a quantifiable proxy of FF and showed the strengths of FSR respect to other proxies for FF by several tests. The new calculation for UDC and FSR often applied to firms without debt rating. This research of quantitative, empirical approach, unexperimental longitudinal design, the explanatory scope used quantitative yearly information of publicly traded firms from Latin America between 2005 and 2016.