Financial flexibility, investment and firm value in Covid-19 pandemic

Abstract

Financial flexibility is the capacity of an organization to react to sudden changes in its cash flows or investment opportunity set in a timely and value- maximizing way. This study aims to examine the impacts of financial flexibility on investment activity and firm value, and answer the question if these impacts are still the same in the lockdown period of COVID-19 pandemic. This study uses the dataset of 233 listed firms in Vietnam in the 2010 - 2020 period, consisting of 2563 observations. First, the study determines which companies in the sample are the most financially flexible by examining their simultaneous low leverage and high cash holdings. Second, the study utilizes the System Generalized Method of Moments (SGMM) to investigate whether financial flexibility has an effect on investment activities and firm value. Our results indicate the significant positive influence of financial flexibility on investment activity and firm value and these influences are even higher during the COVID-19 pandemic. Finally, to check the robustness, the study uses different financial flexibility measurement and leads to the the same effect of financial flexibility to investment activities and firm value. Consequently, companies should lower their debt level and increase cash holding to achieve advantageous flexibility. It is highly suggested that investors predict greater financial flexibility firm by making investments in companies with higher asset values and good opportunities for return on their investments.