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

Published date01 May 2016
Date01 May 2016
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22156
Preserving and Exercising Financial
Flexibility in the Global Financial
Crisis Period: The Japanese Example
Shigeo Takami
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)

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