FO CUS ON… Financial flexibility

Financial flexibility is a major concept of finance. However, despite its importance for managers, financial flexibility has received little attention in the academic literature. This is probably explained by the fact that classical financial theories consider that financial markets are efficient and can finance firms whatever the economic conditions are. Further, for agency theory, firms have to be disciplined which means to limit as far as possible financial flexibility. In this article, we explain why firms need financial flexibility and how they can be financially flexible. We show that financial flexibility is a complex concept that cannot be easily integrated in a unique theory. Considering its importance, academics will have to face the challenge to elaborate a theory of financial flexibility.
Keywords: Investment strategy, Portfolio choice, Conditional Value-at-Risk, Implied volatility, Hedging.
JEL codes: G31, G32, G33, G34, G35