The influence of financial flexibility on firm performance: the moderating effects of investment efficiency and investment scale

Abstract

Purpose Financial flexibility and investment efficiency are of vital importance in strategic choices at boardrooms, particularly in post-crisis recovery strategies. This study examines the moderating effects of investment efficiency and investment scale on the relationship between financial flexibility and firm performance. Design/methodology/approach The authors use sample of 10,755 US-listed firms over the period 2010–2021 to examine the relationships between investment scale, investment efficiency, financial flexibility and firm performance. Particular attention is paid to overinvestment and underinvestment. Findings Findings of this study reveal that financial flexibility mitigates investment inefficiency through reducing overinvestment. Financial flexibility contributes to boost a firm’s accounting and market performance. Additionally, investment efficiency and investment scale have moderating effects on the relationship between financial flexibility and firm performance. However, the influence of investment efficiency is greater than the influence of investment scale. Finally, the authors find that the direct and indirect effects of financial flexibility are stronger on market performance than accounting performance, implying that market is more sensitive to corporate financial policies. Research limitations/implications Findings of this study have implications for scholars, decision-makers policymakers, investors and other stakeholders. Practical implications This study has its own limitations due to the sample selection issues, country context and the research model adopted by this study. Originality/value The novel contribution to the extant literature is incorporating the influence of investment scale and investment efficiency into the relationship between financial flexibility and firm performance.