Financial Flexibility and Managerial Short-Termism

Since the financial crisis of 2008, financial flexibility has gradually become a crucial method employed by enterprises worldwide to resist external risks. Based on a sample of Chinese listed companies from 2005 to 2015, this study investigates the impacts of financial flexibility on firms' earnings management. We find that the managerial short-termism of financially flexible enterprises is significantly lower than that of financially inflexible enterprises. This conclusion holds after the endogenous problem is considered, adjusting the threshold of the definition of financial flexibility and alternative proxies of managerial short-termism. Moreover, the effect of financial flexibility significantly reduces earnings management, which is more significant in private enterprises and low-risk industries. In addition, the probability of financially flexible firms selecting one of the Big Four international accounting firms is higher, whereas that of them receiving nonstandard audit opinions and breaking the law is lower. This paper enriches the research on the economic consequences of financial flexibility from the level of corporate governance, and the conclusions have a certain practical significance for a comprehensive understanding of the current problem of deleveraging in China's enterprises.