Question

How would you respond to a claim by a firm that maintaining flexibility is always good for stockholders, though they might not recognize it in the short term?

Answer 1

I am is of the opinion that maintaining flexibility is usually good for stockholders.

The financial flexibility is that the most vital a part of determination of structure of the corporate capital and may be applied to take care of the debt capacity for the aim of future development of the corporate or minimizing the debts to avoid the financial distress within the economic recession. Also, the managers’ demand for financial flexibility is that the most vital effective think about the debt decisions of the businesses . the pliability of the businesses are often saved by the investment within the actual or financial assets. The financial flexibility are often very profitable for the shareholders, because the external financing is expensive . By the rise of liquidity and leaving collateral value of company assets, the pliability of the corporate from one side causes the rise of debt capacity and also decrease of the bankruptcy costs . Kim et al. (1998) show that the investment within the current (or flexible) assets is expensive , because the corporate can invest on the reproductive fixed assets rather than the present assets. Generally, when the uncertainty is increased within the decision-making, the worth of the flexible assets is increased, too. Therefore, the changes at the debt levels reflect the moderations which may present information in regard of the financial flexibility of the businesses .

The successful performance of the businesses are often effective within the creation of economic stimulus of the investors and ultimately the economic development of the country. This matter which is resulted within the more return for the businesses and shareholders depends to the rise of investment activities for the assembly within the vast scale. The investment activities are most associated with the getting and sale of long-term and short-term investments, tangible and intangible fixed assets and also the payment and reception of the facilities granted to the individual independent from the commercial unit except the workers . consistent with the accounting principle No. 7 of International Accounting Standards Board (1993) and on the idea of aforesaid theoretical foundations and therefore the administered experimental studies,

Hypothesis : the financial flexibility has positive and meaningful effect on the investment activities of the businesses accepted within the stock market .

If the corporate has few cash, it might not be ready to use its own investment opportunities or provide its own financial needs. So, this shortage would have negative effect on the corporate value. Although the existence of money is vital and necessary within the financial balance of all of the businesses , but the extent of importance of existence of this asset are often changed for various companies . The existence of additional cash for a corporation are often considered ambiguous point for the market, because it can have either positive aspects or negative ones. Holding the additional take advantage the businesses from the market are often sign of this matter that these sorts of companies enjoy lower risk, because they need more capacity in encounter to the longer term probable financial problems. On the opposite side, the existence of additional take advantage the businesses can have negative effect on the performance of companies by creating the agency problems for them . Mikkelson & Partch (2003), in their research, revealed that the businesses which hold higher level of money , show better performance, too. They believed that there's no optimal level of money for the corporate and therefore the performance of companies is increased by the rise of level of money holding . So, the additional holding of the cash are often sign of absence of proficient allocation of the recourses and impose some costs on the corporate .

Hypothesis : the financial flexibility has positive and meaningful effect on the quantity of money holding of the businesses accepted within the stock market .

Most of this accounting systems neglect the increasing role and importance of the property right and therefore the knowledge within the novel era organizations and are unable to guage the particular value of the assets in their calculations. In other words, the financial statements have many restrictions within the explanation of the particular value of the businesses . In determining the corporate value, this is often the investor that markets the stock market of the businesses and needs to understand the market price of those exchanges. If a corporation wants to maximise the shareholders’ wealth, it should determine its purposes within the decision-makings in such how that it increases the shareholders’ demand for purchasing stocks and therefore the other papers of the corporate . These sorts of demands would be resulted within the increase of price of that stock market within the market. the rise useful of the natural stock of the corporate is one among the ways to extend the wealth of the shareholders. So, the important matter which should be noticed is that the managers pays attention to the variables and factors which are attracted by the shareholders within the process of determining the worth of stock market . So, the subsequent hypothesis are often mentioned:

Hypothesis : the financial flexibility has positive and meaningful effect on the worth of companies accepted within the stock market .

Managers typically have great flexibility in executing repurchases and will be ready to add value through market timing, buying when shares prices are low and refraining from buying when prices are high. Yet, employing a unique identification strategy, we discover otherwise. Managers repurchase when stock prices are higher and valuation ratios are less favorable. Further, on the average , actual repurchase investments underperform hypothetical investments that mechanically smooth repurchase dollars through time. Poor repurchase timing is correlated with earnings management, investor sophistication, and also with the poor alternative uses of money . Overall, payout flexibility is related to a big cost to long-term shareholders.

In constructing an equity portfolio, the power to interrupt freed from regional borders and therefore the capacity to implement a versatile approach in terms of asset allocation are often beneficial. it'll open the door to a wider pool of companies that otherwise could also be constrained by a country-level bias.

Global managers have used greater investment flexibility to get better results.

The flexibility plays a crucial role in making the managers powerful within the regard of investment within the future. the issues of the capital market have necessitated the upkeep of flexibility for the businesses for the aim of using profitable opportunities. this research has aimed to review the effect of monetary flexibility on the financial behavior. The statistic sample utilized in this study consists of 100 companies accepted in Tehran stock market during the years 2009 to 2015. The financial flexibility and financial behavior are respectively the independent and dependent variables which were measured by the investment activity, dividend payout ratio, amount of money holding and company value. the info analysis was done by the utilization of the multi-variable regression models supported the panel data techniques and therefore the use of Eviews econometrics software. The results concluded from the study of effect of the financial flexibility on the financial behavior like the theoretical foundations which had meaningful and positive effects. Therefore, the hypothesis that the financial flexibility has positive and meaningful effects on the investment activity of the businesses accepted within the stock market was confirmed. the opposite results of paper were that the financial flexibility had negative and meaningful effects on the dividend payout ratio. So, the hypothesis that the financial flexibility has negative and meaningful effects on the dividend payout ratio of the businesses accepted within the stock market wasn't confirmed. The hypothesis that the financial flexibility has positive and meaningful effects on the quantity of money holding of the businesses accepted within the stock market wasn't confirmed, because the effect of the pliability on the quantity of money holding wasn't meaningful. Also, the hypothesis that the financial flexibility has positive and meaningful effects on the worth of companies accepted within the stock market was confirmed.

The financial flexibility is that the affordance of companies for providing the financial recourses to possess a correct reaction within the unexpected cases and the events to maximise the corporate value . Heath (1978) explains the financial flexibility because the power of corrective action for removing the cash paid being more than the anticipated cash received with minimum effects on this and future income or the market price of the corporate stock . the businesses with financial flexibility can stand against the financial pressures and when the profitable opportunity is achieved, they might provide the cash needed for the investment with minimum cost . the businesses with financial flexibility keep a reserved debt capacity for themselves so as to be ready to apply more investment conservatism policy within the next years. The financial flexibility may be a grade of capacity of 1 company in order that it can equip its financial recourses within the regard of reactive activities to maximise the corporate value . Gamba & Triantis (2008), in their study for determining a model for the measurement of the financial flexibility, defined the financial flexibility because the capacity of 1 company to realize and restructure its financing with the financing with lower cost. They express that the businesses with financial flexibility can avoid the financial distress within the situation of negative shocks and that they invest with low cost, when the profitable opportunities are increased . The investment of the businesses because the reproductive of money flow plays a crucial role within the long-term performance, future value of companies and also the event of the countries. So, the popularity of the investment stimulus within the companies is extremely significant. The behavioral effect of the investors is predicated on the behavioral financial theory which interprets the deviation of the stock price from its intrinsic value. The behavioral financial is one among the important factors of the market deficiencies that specialise in the systematic event of decision-making error of the investors and managers and surveys the way during which the investors and managers make a scientific and intellectual error in their judgments . The results of studies done by De Jong et al. (2012) revealed that one increase within the variance of the financial flexibility would be resulted within the 5 percent increase of the longer term investments. the most purpose of this paper is that the study of effect of the financial flexibility on the financial behavior within the companies accepted in Tehran stock market .