Investigating the Impact of Financial Flexibility and Managerial Ability on Stock Return Volatility with Intervention to the Role of Corporate Default Risk (a Dynamic Behavior Approach)

Articles in Press

Document Type : Research Paper

Authors

1 Department of financial management.Islamic Azad University Qazvin branch Iran

2 Department of financial management. Islamic Azad University, Qazvin branch, Iran

3 Tehran University

4 Qazvin Islamic Azad University

10.22059/frj.2024.372899.1007577

Abstract

Purpose : The purpose of the Impact of Financial Flexibility and Managerial Ability on Stock Return Volatility with Respect to the Role of Corporate Default Risk for the companies listed on the Tehran Stock Exchange using linear method and non - linear method ( dynamic behavior approach ) .

Method :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 consisted of all the companies listed on the Tehran Stock Exchange during 1392-1401 solar Hijri . Eighty - two companies were selected as the study sample . The research hypotheses were tested using the linear regression model and Eviews software .

Findings :The findings showed that financial flexibility and managerial ability have a significant inverse 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 . Also , 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 . Also 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 shows that financial flexibility , managerial ability , financial flexibility× default risk and managerial ability× default risk have strong correlations with the stock return volatility . Also , the correlation dimension shows that financial flexibility and managerial ability respectively have the lowest and the highest correlation with the stock return volatility .

Conclusion : By increasing the financial flexibility of the companies admitted to the Tehran Stock Exchange in the previous year, the volatility of the current year's stock returns of these companies will decrease . With the increase in the default risk of the companies listed in the Tehran Stock Exchange, the effect of financial flexibility on the volatility of the company's stock returns this year decreases.

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Financial Research Journal

Articles in Press, Accepted Manuscript
Available Online from 27 May 2025

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