Gamba and Triantis look at the relationship between financial flexibility and Investment flexibility. Not surprisingly, they find the two are related.
"We find that firms with greater investment flexibility derive less value from financial flexibility, indicating that these two dimensions of flexibility are substitutes to some degree....we demonstrate that firms that face financing frictions should simultaneously borrow and lend, and we examine the nature of the dynamic debt and liquidity policies and the value associated with corporate liquidity."Translated for the less financially savvy of you: firms that can "time" their investments need less flexibility on the financial side of the balance sheet. Additionally, they find that if there are significant market frictions to raising new capital, then cash and financial flexibility in general are good.
"The effect of financial flexibility on firm value can, however, be quite significantWhile not unexpected (it has been taught for years), it is an important contribution on the interrelationships between the left hand side and the right hand side of the balance sheet.
when investment flexibility is low, when there is significant upside for growth, and when high volatility in the firmÂs profitability makes it more difficult to maintain stable internal cash reserves. Firms in such circumstances would be appropriate targets for acquisitions by companies having large internal cash reserves, and our analysis allows us to gauge the magnitude of value creation through such transactions. We also find that having more reversible capital adds even more value to the firm when its financial flexibility is lower. Thus, investment and financial flexibility appear to be substitutes to some extent."
Gamba, Andrea and Triantis, Alexander J., "The Value of Financial Flexibility" (May 2005). EFA 2005 Moscow Meetings http://ssrn.com/abstract=677086