The relationship between financial flexibility and cash policies with an emphasis on the life cycle of companies admitted to the Tehran Stock Exchange

Dissertation for Master's degree (M.A)

Trend: Accounting

Abstract

Nowadays, with the increasing acceleration of changes in the internal and external factors of organizations, the need to increase flexibility against changes is absolutely necessary, therefore, the purpose of this research is to examine the relationship between financial flexibility and cash policies with an emphasis on the life cycle (maturity, growth and decline) in companies admitted to the Tehran Stock Exchange. is In this research, the number of 152 companies admitted to the Tehran Stock Exchange has been examined by the method of systematic elimination in the time period of 2007-2012. To test the hypotheses, the pooled regression model (integrated) was used in the Eviews software. The findings of the research show that in general there is a positive relationship between financial flexibility and cash policies, and this relationship is also the same during the life cycle of maturity, growth and decline. 

- Introduction

The problem of representation is caused by the motivation of managers to achieve personal interests, one of the main assumptions of representation theory is that the managers of the company "brokers" and the shareholders of "employers" have conflicts of interest and managers do not necessarily make decisions for the benefit of the shareholders. In today's competitive world, financial flexibility is one of the key factors of the organization's survival and a tool for superiority over competitors. In addition, financial flexibility is usually a subjective and informal issue. And the degree of flexibility is rarely examined and measured.

Financial flexibility indicates the ability of a company to face future events. Financial flexibility is a degree of a company's capacity that can equip its financial resources for reactive activities to maximize the company's value (Sukbayon [1], 2007). On the other hand, considering that in the theory of cash holding, the concept of flexibility is reflected in the presence of financing companies due to the precautionary motive to save cash, and considering that financial flexibility is considered important from the point of view of most users, therefore, the present research will continue to examine the description of the problem statement, the necessity of conducting research, the question, the hypotheses of the research, and so on.

1-2- Description and statement of the problem

One of the main goals of financial statements stated in the theoretical concepts of financial reporting in Iran is to "provide summarized and classified information about financial flexibility" (paragraph 1- chapter 1- theoretical concepts of financial reporting in Iran, 2017). In this definition, financial flexibility is "the ability of a business unit to take effective action to change the amount and time of cash flows", so that it can react to unexpected events and opportunities. Financial flexibility originates from various sources, for example, the ability to acquire new capital in the short term through the issuance of partnership bonds, the ability to obtain cash through the sale of assets without disrupting ongoing operations, and so on. Among these sources are (paragraph 1-11 theoretical concepts of financial reporting in Iran, 2017).

Managers have stated that flexibility plays an important role in empowering them to invest in the future (Bansal and Mito [2], 2004). Based on discussions by Modigilani and Miller [3] (1963), capital market problems have made it necessary for companies to maintain flexibility in order to take advantage of profitable opportunities (Khodai and Zare Timuri, 2019). Due to the many ambiguities in the use of this term, judgment about financial flexibility is usually subjective and informal. And the degree of flexibility is rarely examined and measured. Financial flexibility indicates a company's ability to face future events (same source).

Cash flexibility refers to the company's ability to access financial resources at a low cost and to face unexpected changes in the company's cash flow or timely investment opportunities (Dennis [4], 2011). The examination of cash policies shows that financial flexibility is the most important determining factor of large companies for capital structure decisions, but flexibility as a determining factor affects the financial policies of companies (Graham and Harvey [5], 2001). How to use internal funds is an important decision in the conflict between shareholders and managers.During the company's economic growth, as the cash reserves increase, the managers decide whether the cash will be distributed to the shareholders, spent on internal expenses, used for foreign education, or still kept? How the managers choose between using or keeping the cash reserves is an ambiguous issue (Fakhari and Tagavi, 2018).

As the amount of cash in the US companies' balance sheets increases, It also affects how to manage liquidity and access to capital. It should be noted that this issue is caused by the precautionary hypothesis. In the cash holding theory, the concept of flexibility in the presence of corporate financing is reflected due to the precautionary motive to save cash. Specifically, the precautionary hypothesis of firm savings is that firms consider cash as a buffer against negative cash flow shocks due to costly external financing (Lin et al., 2001). Bates et al.[7] (2009) and Duchin[8] (2010) among others provided evidence of the role of precautionary savings in monetary policy. Cash studies are typically used to substitute cash for leverage such as net working capital. Almeida et al. (2004) and Fayol-Kander and Wang [9] (2006) showed that the cash policy is more important when companies have financial constraints. The results of the research of Esraer and Tesmar [10] (2010) show that specifically, changes in the value of the company's collateral, which is from changes in local real estate prices as an exogenous factor, leads to an increase in financial flexibility. A company with more tangible assets has a higher recovery rate in the financial crisis, and banks are more likely to offer contract terms with regard to these types of assets. As a result, tangible assets can cause concerns about replacing assets and improving debt risk, which increases the company's financial flexibility (Berger et al. [11], 2011). According to Chani et al.[12] (2012), financial flexibility firstly exerts effects on the company's financial policies, and ultimately leads to a higher level of cash accumulation and very little changes in cash shocks. Also, companies that have cash savings have less cash flow sensitivity than cash.

According to Jacob Oded [13] (2012), financial flexibility is one of the influential factors of agency issues. Financial flexibility is a degree of a company's capacity that can equip its financial resources in the direction of reactive activities to maximize the value of the company (Sik Bin [14], 2007). According to Marchika and Mara [15] (2007), one of the indicators of measuring financial flexibility is the leverage ratio, which decreases in consecutive years, indicating the company's financial flexibility. In general, the relationship between agency issues and financial flexibility can be analyzed from two perspectives: Li [16] (2010) states from the perspective of the efficiency of contracts that in a summary according to the results of previous researches, the conflict of interests between management and shareholders increases the cost of debt contracts, which will cause less participation of debt and capital suppliers in the process of increasing the company's capital, which ultimately reduces the company's flexibility. Therefore, considering the above from the point of view of efficiency of contracts, we expect that companies with higher agency costs have less flexibility.

On the other hand, Guai and Vericchia [17] (2006) state from the point of view of information inefficiency that agency issues have caused the manager to take advantage of his agency power and report the net value of the business unit and the book leverage ratio more compared to its economic value and real economic leverage. These effects increase the company's debt and credit capacity and increase the company's ability to attract capital and increase the company's flexibility. On the other hand, based on the concept of "company life cycle [18]", companies also have a life cycle like living organisms, which includes emergence (birth), growth, maturity and decline. Knowing the stage in which the company is located allows the users of accounting information to better evaluate the company's financial information, its current and future needs (such as the need for capital) (investment and financing) as well as perform management capabilities (Ghekrit and Ghorbani, 2016). In the same way, companies in the growth stage and with many investment opportunities tend to have less cash flow as a result.