Cash Flow at Risk, Financial Flexibility and Financing Constraint

The liquidity shock during the global crisis required corporate-level adjustment policies. The financial and real economy crisis revalued corporate liquidity, financing and investment flexibility, as well as the mitigation of corporate cash flow volatility using risk management techniques. This study links the corporate cash-flow-at-risk concept with financing flexibility through high risk capacity, highlighting the relationship between lower side risks and financing constraint in periods of decline in liquidity. A com-pany determines the sequence of cash flow allocations over different cash commitments, such as marketing expenses, research and development, capital expenditure, dividend disbursement and debt service, in view of the expectations concerning future cash flow volatility. The low and high levels of corporate free cash flow resulting from a scenario analysis open up a new version of corporate valuation methodology enriched by cash-flow-at-risk models. With an increase in lower side risks, the role of risk management is to provide additional flexibility for investment and financing decisions.