Investment, firm-specific uncertainty, and financial flexibility

We study how financial flexibility impacts on firm's investment decisions under uncertainty. We use a comprehensive dataset covering US firms for the period 1983-2019. We develop a baseline model of investment under uncertainty and characterize the bindingness of financial constraints. We then use this model to explore firms' investment responses under uncertainty in the presence of financial constraints under different assumptions regarding the value they assign to financial flexibility. Our results point to a negative uncertainty-investment relationship for constrained firms, withstanding the impact of the value of financial flexibility on this relationship. This negative relationship, however, is less pronounced when the value of financial flexibility is higher (especially for younger financially constrained firms). (c) 2021 Published by Elsevier B.V.