Abstract
We explore the non-linear relationship between financial flexibility and enterprise risk-taking, investigating the non-linear nature of this association across distinct periods: pre-pandemic, post-pandemic, and the overall sample period. We analyze a sample of 2503 Chinese listed firms, segmented into different time phase. Our design allows for an examination of how financial flexibility relates to risk-taking under various economic circumstances. Utilizing a two-step system GMM approach, as expected, we evidence a positive relationship between financial flexibility and risk-taking. However, squared financial flexibility has a negative and significant impact on risk-taking before the pandemic and across the overall period, while insignificant post-pandemic. These results are consistent with a shift towards enterprise risk-taking being less sensitive to levels of financial flexibility during times of excess financial resources. Moreover, we evidence diminishing returns in risk-taking opportunities beyond a specific threshold of financial flexibility, consistent with this association having non-linear dynamics. These findings highlight the crucial role of maintaining a balanced financial approach for fostering healthy firm-level risk-taking behavior.
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