Financial flexibility and the effect of its components on working capital: A study on Borsa Istanbul

Financial flexibility refers to a firm's ability to effectively and rapidly utilize its existing resources and borrowing capacity when confronted with unexpected investment opportunities and sudden liquidity needs. From the perspective of working capital management, financial flexibility improves firms' ability to fulfill short-term obligations and debts, thereby lessening liquidity risk and contributing to the continuity of operations. Firms that maintain financial flexibility through unused debt capacities and/or unused cash reserves have the potential to respond quickly to unexpected financing needs by minimizing the opportunity costs that may arise from previously unused cash and borrowing capacity. This study aims to investigate the impact of financial flexibility on working capital requirements through the dimensions of cash flexibility and debt flexibility. Furthermore, the study aims to examine the nature and extent of the relationship between firms' working capital requirements and firm-specific factors such as operating cash flow, firm size, gross profit margin, firm growth, financial distress, and the market-to-book ratio. For the period 2007–2023, this study analyzed financial statements of non-financial firms listed on Borsa Istanbul (BIST) and the analysis was carried out using a panel data–based fixed effects model implemented in Stata. The findings revealed that financial flexibility has a positive and statistically significant effect on working capital requirements. When the components of financial flexibility were examined separately, it was found that only debt flexibility had a positive and statistically significant effect on working capital requirements, whereas cash flexibility had no statistically significant effect. In addition, among the firm-specific variables, financial distress was observed to be the only variable with a significant effect on working capital requirements, and this effect was negative. Keywords: Financial flexibility, cash flexibility, debt flexibility, working capital