Financial Flexibility and the Moderating Role of Principal-Principal Conflict

Abstract

This paper examined the ability of principal-principal conflict to moderate the relationship between financial flexibility and its outcomes, namely investment propensity and dividend payout. Financial flexibility was measured using triple indicators of liquidity, internal funds, and spare leverage capacity. This research used a sample of publicly listed firms in the Caribbean to examine this issue and conducted a secondary data analysis of financial statement data using Generalized Methods of Moments techniques. Testing revealed that principal-principal agency negatively moderates the relationship between financial flexibility and dividend payouts, and positively moderates the relationship between financial flexibility and investment propensity. The results of this study suggested that concentrated ownership may at times positively impact the benefits of financial flexibility through higher levels of investment, but lower dividends maybe paid in the interest of maintaining future financial flexibility. These results reinforce the need for a customized approach to the setting of appropriate corporate governance policy for firms in transitioning markets, which limits the possibility of expropriation of minority shareholders, while promoting the investment benefits and prudent financial management which comes with the identification of block holder ownership.