Degree of Financial Flexibility and its Impact on Investment Activities, Cash Holdings and Firm Performance

Abstract

Financial flexibility is a primary concern of company executives. Academics are increasingly arguing that a company's desire to preserve flexibility is a key component of its financial practices. This paper empirically investigates the influence of financial flexibility on investment activities, cash holding, and firm performance. It will also explore how the sensitivity of investment activities to cash flow is determined by financial flexibilities. Study used the panel data of Pakistan-listed textile firms from 2011 to 2020 and regression analysis was carried out by using E-views software for testing the hypothesis of the study. Data were retrieved from the official website of PSX. The study found that financial flexibility positively associated with investment activities while has negative and significant impact on cash holding. The debt ratio and dividend payout ratio (financial flexibility) have a significant and positive influence on firm performance for both ROA and OPM. The study concluded that financial flexibility has a direct influence on the performance and investment activities of textile firms of Pakistan but a negative influence on cash holdings. The findings also suggest that financial flexibility is an essential element of the company's business strategy and is critical for investment decisions. The major findings are that companies with a high level of financial flexibility are less affected by the crisis.