Financial Flexibility and Corporate Performance: The role of Boardroom Dynamics

Abstract

This paper analyzes how financial flexibility influences corporate performance and how boardroom heterogeneity acts as a moderator in the financial flexibility and corporate performance nexus, based on data of Chinese listed companies from 2016-2023. Financial flexibility’s contribution to corporate performance is firmly established in developed markets, but its dynamics in developing markets are less clear. China’s distinctive institutional environment of state ownership, regulatory barriers, and concentrated ownership emphasizes the necessity for financial flexibility to manage uncertainties and maintain competitiveness. The estimates, acquired by system GMM estimation, exhibit that financial flexibility significantly improves company performance. Furthermore, boardroom heterogeneity strengthens this association, which emphasizes how diverse boards are crucial in maximizing the prudent use of financial resources. These findings put forward several practical implications for corporations and policymakers, highlighting the need to encourage financial flexibility and board diversity to boost long-term corporate performance.

Keywords: Financial flexibility, boardroom heterogeneity, firm performance, corporate governance, Chinese listed firms, emerging markets, system GMM.