Preserving and Exercising Financial Flexibility in the Global Financial Crisis Period: The Japanese Example

• Published date: 01 May 2016
• Date: 01 May 2016
• DOI: http://doi.org/10.1002/jcaf.22156

13

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22156

f

e

a

t

u

r

e

a

r

t

i

c

l

e

Preserving and Exercising Financial

Flexibility in the Global Financial

Crisis Period: The Japanese Example

Shigeo Takami

INTRODUCTION

Graham and Har-

vey (2001, p. 218), in

a directed question-

naire survey among

392 U.S. chief finan-

cial officers (CFOs)

on corporate finance

practice, stated: “The

most important item

affecting corporate

debt decisions is man-

agement’s desire for

financial flexibility.”

Financial flexibility,

in brief, refers to

firms’ conservative

financial behavior

in normal business

conditions in order to

extract external fund-

ing when sporadic

cash shortfalls occur.

As Gamba and Trian-

tis (2008, p. 2263) put

it, “Financial flex-

ibility represents the

ability of a firm to

access and restructure

its financing at a low

cost. Financially flex-

ible firms are able

to avoid financial

distress in the face

of negative shocks,

and to readily fund

investment when

profitable opportuni-

ties arise.” Addition-

ally, financial flex-

ibility implies ample

cash holdings and

low or zero leverage.

As Arslan-Ayaydin,

Florackis, and Ozkan

(2014, footnote 2)

remark, “The main

argument of both

lines of [financial

flexibility] research

is that firms with

readily available large

cash balances or low

leverage can better

cope with earnings

shortfalls and hence

avoid underinvest-

ment.” This raises a

question about the

This article examines whether Japanese firms rep-

licate the DeAngelo and DeAngelo (D&D) model,

which assumes that firms achieve financial flex-

ibility by increasing their debt capacity or paying

out large dividends and exercise it when abnormal

cash shortfalls occur. The article analyzes frequency

distributions and means across three net cash out-

lay states (extreme deficits, deficits, and surplus)

using 10-year panel data on 1,555 Japanese firms.

It also conducts Tobit regression analyses based

on the dynamic features of financial flexibility pos-

tulated by D&D. The results reveal that Japanese

public firms did not effectively utilize financial flex-

ibility to raise external funds in times of financial

need, particularly during the global financial crisis

sparked by the Lehman Brothers collapse in 2008.

This article therefore concludes that the D&D model

does not fit the data. Further, the results imply that

although Japanese public firms may have virtually

no debt, their motive is not to achieve financial flex-

ibility, but to maintain bank relationships through

cross shareholding or the main bank system. This is

the first study to directly test the D&D model, show-

ing that it cannot be generalized, particularly in the

case of Japan, where the relationships between

firms and banks are strong.

© 2016 Wiley Periodicals, Inc.

Refereed (Double-Blind

Peer Reviewed)