The Value of Financial Flexibility and Payout Policy

Abstract

We propose a novel empirical measure for a firm’s value of financial flexibility and examine its impact on payout decisions. Studying listed firms from 23 countries over the 1998-2008 period, we find convincing evidence that the value of financial flexibility is an important determinant of payout policy. Specifically, firms with a high value of financial flexibility tend to limit or even avoid payouts. If such firms decide to disgorge cash, they prefer share repurchases to dividends. Overall, our results are consistent with the view that financial flexibility considerations determine the pecking order of payouts. JEL classification: G32, G35