Modified Total Interpretive Structural Model of Corporate Financial Flexibility

Abstract

In present dynamic environment, financial flexibility has become an important constituent of corporate finance decisions. Financial flexible firms are ostensibly more resilient to exogenous shock vis-a-vis non-flexible firms. Capital structuring decisions, payout decisions and conservative cash policy are various tactics adopted by financial managers for attaining financial flexibility. Present study attempts to identify key enablers of financial flexibility and structure them into a total interpretive structural model using modified TISM approach. Using literature review, business environment, cost of capital, stage of life cycle, free cash reserves, agency relations, payout policy, and leverage are identified as seven constituents of corporate financial flexibility. Based on their interpretive interdependencies/ relationship, a hierarchical model of financial flexibility is developed exhibiting a holistic view of financial flexibility decisions from triggers to final outcome. The findings result into a four-step novel framework situation-actors-actions-outcome framework of financial flexibility, with business environment and stage of life cycle as situation/ triggers, free cash reserves and agency as actors/precursors, payout and leverage as actions/ decisions and cost of financing as outcome of financial flexibility decision. Model lends credence to financial flexibility as situation-specific decision. It is a reservoir to address exogenous income and investment shocks. Firms generating free cash flow are invariably flexible to meet income and investment shocks. However, firms with fluctuating operations need buffer in form of cash reserves or debt capacity to address the contingencies. Investment in good corporate governance practices can serve as an intangible reserve and an alternative to costly tangible ways such as cash surplus and leverage. Such firms with shareholders’ support are deemed more flexible in payouts, capital structuring, investment decisions and overall operations, and less reliant on external financing.