The Impact of Financial Flexibility and Managerial Ability on Stock Return Volatility: The Mediation of Company Default Risk (A Dynamic Behavioral Approach)

Document Type : Research Paper

Authors

1 Ph.D. Candidate, Department of Financial Engineering, Faculty of Management and Accounting, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

2 Associate Prof., Department of Financial Management, Faculty of Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

3 Assistant Prof., Department of Financial Management, Faculty of Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

4 Assistant Prof., Department of Mathematics and Statistics, Faculty of Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran.

10.22059/frj.2024.372899.1007577

Abstract

Objective
The purpose of the present study was to investigate the impact of financial flexibility and managerial ability on the stock return volatility moderated by default risk for the companies listed on the Tehran Stock Exchange using linear and non-linear (a dynamic behavior).
Methods
To this end, financial flexibility was measured using the average of five measures (cash to total assets, current assets to total assets, tangible assets to total assets, intangible assets to total assets and capital to total assets), managerial ability was measured using Demerjian (2012)'s data envelopment analysis and corporate default risk was measured using Fulmer H score model. The statistical population of the present study comprised all companies listed on the Tehran Stock Exchange during the years 2013-2022. A sample of 82 companies was selected for the study. The research hypotheses were tested using a linear regression model.
Results
The findings showed that financial flexibility and managerial ability have a significant impact on the stock return volatility and that the corporate default risk moderates the impact of financial flexibility and managerial ability on the stock return volatility. In addition, the study of the model using a non-linear method showed that the Lyapunov exponent (LyE) was positive for all the variables. It shows that the system variables separate at a high rate in infinitesimally close trajectories, and this results in a chaotic system. It can be concluded that financial flexibility, managerial ability, and default risk have an impact on stock return volatility; however, these independent and moderating variables may have no impact on the dependent variable in the future. On the other hand, the entropy coefficients of the sample show that financial flexibility×managerial ability does not predict the variation in the stock return volatility; however, financial flexibility×default risk predicts that variation. The DFA alpha coefficient indicates that financial flexibility, managerial ability, financial flexibility × default risk, and managerial ability × default risk have strong correlations with stock return volatility. The correlation dimension reveals that financial flexibility and managerial ability have the lowest and highest correlations, respectively, with stock return volatility.
Conclusion
Given the findings of the study, it can be concluded that the current year's stock return volatility of the companies listed on the Tehran Stock Exchange increases with their previous year's financial flexibility. Moreover, the impact of managerial ability on the current year's stock return volatility of these companies decreases with their default risk.

Keywords

Main Subjects

References

 
Abbaspour, A., Rahimian, H., Mehregan, M. R. & Ahmadnia, H. (2016). Data Envelopment Analysis as a Measure of Organizational Performance, Planning and Benchmarking in the Education System. The Quarterly of Educational Measurement, 6(23), 99-116.
(in Persian)
Barclay, M. J., Fu, F. & Smith, C.W. (2012). Rational financial management: Evidence from seasoned equity offerings. In AFA 2010 Atlanta Meetings Paper. Available at SSRN https://ssrn.com/abstract=1099850.
Bonaime, A. A., Hankins, K. W. & Harford, J. (2012). Financial Flexibility, Risk Management, and Payout Choice. The Review of Financial Studies, 27(4), 1074-1101.
Byoun, S. (2007). Financial flexibility, leverage, and firm size. Waco, TX. January, 3, 1-83.
Chalaki, P., Ghayoor, F. & Belkameh, H. (2017). Investigating the Impact of Default Risk on Earnings Response Coefficient with Emphasis on Corporate Governance in the Companies listed on the Tehran Stock Exchange. Financial Accounting Research, 8(4), 93-114. (in Persian)
Chen, S. S. & Lin, C. Y. (2018). Managerial ability and acquirer returns. The Quarterly Review of Economics and Finance, 68, 171-182.
Chen, T., Harford, J. & Lin, C. (2013). Financial Flexibility and Corporate Cash Policy. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2298628
Cherkasova, V. & Kuzmin, E. (2018). Financial Flexibility as an Investment Efficiency Factor in Asian Companies. Gadjah Mada International Journal of Business, 20 (2), 137-164.
Demerjian, P., Lev, B., Lewis, M. & Mc Vay, S. (2012). Managerial Ability and Earnings Quality. THE Accounting Review. American Accounting Association, 88 (2), 463-498.
Demerjian, P., Lewis-Western, M. & McVay, S. (2020). How does intentional earnings smoothing vary with managerial ability? Journal of Accounting, Auditing and Finance, 35 (2), 406-437.
Heidari Soltan Abadi, H. (2023). Investigating the Impact of Executive Management Overinvestment on Stock Returns, Return Volatility and Adjusted Returns in the companies listed on the Tehran Stock Exchange. The 9th International Conference on Management and Accounting Science, Iran, Tehran, May 12. (in Persian)
Huang, T., Kumar, A., Sacchetto, S. & Alert, C. V. (2021). Stock Comovement and Financial Flexibility. Journal of Financial and Quantitative Analysis, 59(3), 1141-1184. Available at SSRN: https://ssrn.com/abstract=3470759
Izadi Taromsari, M. (2022). Investigating the Impact of Financial Flexibility and Investment Decisions on Future Stock Returns in the Companies listed on the Tehran Stock Exchange. M.A. Thesis. Qaemshahr, Farvardin Higher Education Institution, Department of Accounting. (in Persian)
Kuznetsov, N.A. & Rhea, C. K. (2017). Power Considerations for the Application of Detrended Fluctuation Analysis in Gait Variability Studies. PLoS One, 12(3). e0174144–e0174144, doi:10.1371/journal.pone.0174144.
Li., H. & Chen, J. (2022). Does higher investment necessarily reduce stock returns. Pacific. Basin Finance Journal. Vol. 72.
Mahboubi, H., Daman Keshideh, M., Momeni Vesalian, H. & Nesabian, Sh. (2023). The Impact of Macroeconomic Indices on Stock Return Volatility. Financial Accounting and Auditing Research, 1(3), 199-218. (in Persian)
McCamley, J., Denton, W., Arnold, A., Raffalt, P. & Yentes, J. (2018). On the Calculation of Sample Entropy Using Continuous and Discrete Human Gait Data. Entropy, 20, 764, doi:10.3390/e20100764.
Mohammadzadeh Gonabadi, A., Cesar, G. M., Buster, T. W. & Burnfield, J. M. (2022). Effect of Gap-Filling Technique and Gap Location on Linear and Nonlinear Calculations of Motion during Locomotor Activities. Gait Posture, 94, 85–92, doi:10.1016/j.gaitpost.2022.02.025.
Rahnamay Roodposhti, F., Ahmadvand, M. & Sadevand, M. J. (2016). Examining the Ability of EVA Momentum, EVA Spread and Conventional Performance Measures to Predict Stock Return. Financial Research Journal, 18(2), 307-330. (in Persian)
Rajput, S. K. O., Wongchoti, U., Chen, J. & Faff, R. (2019). Is Financial Flexibility a Priced Factor in the Stock Market? The Financial Review, 54, 345-375.
Saedi, R. & Rezaeian, V. (2019). The Effect of the Manager’s Excessive Self-Confidence on Stock Returns and Unsystematic Stock Risk Given the Dual Role of Managing Director: Evidence from Tehran Stock Exchange. Financial Research Journal, 21(1), 79-100.
(in Persian)
Salehabadi, A., Fadaienejad, M.E. & Joshan, E. (2018). The Effect of Sokuk Issuance on Risk-adjusted Return and Stock Trading Value. Financial Research Journal, 20(4), 427-444. (in Persian)
Świtoński, A., Josiński, H., Polański, A. & Wojciechowski, K. (2023). Correlation Dimension and Entropy in the Assessment of Sex Differences Based on Human Gait Data. Frontiers in Human Neuroscience, 17.
Xu, Q., Fernando, G. D. & Schneible, R. A. (2022). Age diversity, firm performance and managerial ability. Review of Accounting and Finance, 21 (4).
Zahid, R. M. A., Khan, M. K. & Kaleem, M. S. (2023). Skilled managers and capital financing decisions: navigating Chinese firms through financing constraints and growth opportunities. Kybernetes, 53(11), 4381-4396. https://doi.org/10.1108/K-02-2023-0268
Financial Research Journal
Volume 27, Issue 3
2025
Pages 566-596

Files

Share

How to cite

Statistics