CKGSB Professor Wins CICF Best Paper Award for Novel Measure of Financial Flexibility

BEIJING, Aug. 1, 2023 /PRNewswire/ -- CKGSB Professor of Finance Dr. Erica Xuenan Li and her coauthors have won the CICF Best Paper Award by the China International Conference in Finance in 2023. The paper "Balance Sheet Financial Flexibility", co-authored by Professor Li, Professor of Finance Sudipto Dasgupta at CUHK and PhD student Siyuan Wu at CUHK, is one of the three award-winning papers out of 2,000 papers submitted worldwide.

Financial flexibility is a key factor affecting business investment decisions and is said to be the primary goal when building corporate capital structures. Existing research, such as the Kaplan-Zingales (KZ) index, Whited-Wu (WW) index, and Hadlock-Pierce (HP) index, often uses financial constraint (FC) to measure financial flexibility, which in fact has little out-of-sample explanatory power and hence limited value of reference for corporate financial decision-making.

In contrast, Professor Li's research proposed a novel method to measure financial flexibility based on firms' investment behavior rather than financial statement disclosures.

In this paper, Professor Li and co-authors developed a financial flexibility index (FF Index) by analyzing balance sheet variables that distinguish firms with investment spikes from those that do not during industry-level investment surge.

The FF index outperforms the five popular measures of FC indices in explaining and predicting investment spikes in both in-sample and out-of-sample tests, providing a tool for predicting corporate investment decisions.

"We are glad that our research is recognized by CICF. We hope that with this paper and its findings, we can offer a more effective, comprehensive and concise index to investors and policymakers to measure corporate financial flexibility, so as to grasp companies' financial position and investment capacity with more accuracy." said Professor Li.

Since 2002, the China International Conference in Finance (CICF) has been providing an open platform that brings worldwide scholars together to present current research and stimulate new development in finance, becoming one of the four major global financial academic conferences.

Established in Beijing in November 2002, Cheung Kong Graduate School of Business (CKGSB) is China's first privately-funded and research-driven business school. The school aims to cultivate transformative business leaders with a global vision, sense of social responsibility, innovative mindset, and ability to lead with empathy and compassion. Dr Erica X.N. Li is a Professor of Finance and Director of China Industrial Policy Research Center at CKGSB.