The impact of financial flexibility on debt maturity structure for Australian and Malaysian firms

Abstract

Financial flexibility enables firms to respond positively to unanticipated shocks or investment opportunities. Financial flexibility and the debt maturity structure are important for a firm's survivability. During a crisis, highly leveraged firms cannot survive due to the inability to pay back and roll over their debt for longer maturity. Financial flexibility could contribute better capital structure decisions and reduce risk. This paper investigates financial flexibility and the impact on the debt maturity structure in Malaysian and Australian firms. The results suggested that Malaysian firms follow a pecking order theory, whereas Australian firms follow the trade-off theory. Financial flexibility firms are generally less leveraged. These firms were found to have less long-term debt in both countries. They prefer short-term debt since they are able to access financing resources at lower cost. Non-financial flexibility firms prefer long-term debt because of the reduced capability of repayment and the high rollover risk if they hold short-term debt.