Financial Flexibility and the Impact of Global Financial Crisis: Evidence from France

Abstract

We survey and interview Chief Financial Officers (CFOs) of French firms in 2009 about the impact of the global financial crisis and their firms’ financial flexibility levels before and during the crisis. Over two-thirds of CFOs report a strong impact of the crisis and cite liquidity problems, banks’ reluctance to lend, and cost cutting as their major concerns. We find that firms with greater internal financing have significantly lower crisis impact. They are also more likely to have lower leverage, higher cash-to-asset ratios, and report a lower effect on their business operations. By contrast, the relation between the firm’s level of access to external financing (self-reported by CFOs) and the crisis impact is much weaker. We also find that firms with high short-term debt are significantly more concerned about financial distress, working capital problems, access to external financing, and more likely to sell assets during the crisis than firms with high long-term debt. Our analysis indicates that an index based on the firm’s leverage, liquidity, and operating ratios, similar to the Altman Z-score, might be a better financial flexibility measure than long-term debt ratio. Our evidence also confirms the findings of prior surveys that financial flexibility is important for capital structure decisions.