Debt Structure and Financial Flexibility

I study the relation between firm debt structure and future financial flexibility. I consider how the total level of debt, maturity, security, and priority may potentially impact a firm’s ability to raise new financing and undertake profitable investments. I find that firms with lower total debt (high debt capacity) are more financially flexible. Lower leverage increases future new debt issues and investment, and firms do not fully rebalance by reducing the use of external financing sources such as equity. Furthermore, in contrast to previous empirical results, I find that greater reliance on long-term debt may be associated with higher ex-post flexibility, in particular a significantly higher amount of investment. This is consistent with theoretical predictions on rollover risk. Finally, my results support the view that greater reliance on unsecured debt can increase future debt financing. Overall, my paper offers new insights into how aspects of debt structure are related to financial flexibility. Department of Finance, Arizona State University, P.O. Box 873906, Tempe, AZ 85287-3906; [email protected], 605-999-5170. I thank Yuri Tserlukevich, Andra Ghent, Mike Hertzel, Luke Stein, and Ilona Babenko for helpful comments and discussions thus far. The most recent version of this paper can be found at https://sites.google.com/site/seanjflynnjr/research