The Nonlinear Relationship Between Financial Flexibility and Corporate Risk-Taking: The Role of Financial Constraint and Social Responsibility

Articles in Press

Document Type : Research Paper

Authors

1 Department of Financial Mathematics, Faculty of Financial Sciences, Kharazmi University, Tehran, Iran

2 Department of Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran

Abstract

Corporate risk-taking, as a primary driver of strategic decision-making, plays a pivotal role in value creation, operational dynamics, and the sustainability of a firm’s competitive advantage. This study provides a comprehensive examination of the dynamic relationship between financial flexibility and corporate risk-taking, focusing on the structural heterogeneity arising from financial constraints, while evaluating the moderating role of corporate social responsibility (CSR). The research sample comprises 164 firms listed on the Tehran Stock Exchange over the period 2015–2024 (yielding 1,640 firm-year observations). The hypotheses were tested utilizing a dynamic panel data approach via the two-step System Generalized Method of Moments (System-GMM) to effectively control for endogeneity biases and unobserved firm heterogeneity.

The empirical findings demonstrate that for the full sample, the relationship between financial flexibility and corporate risk-taking is non-linear and U-shaped (descending-then-ascending). This implies that the initial accumulation of flexible resources triggers conservative behavior, thereby reducing risk-taking; however, once a specific threshold is surpassed, it stimulates managerial audacity to pursue value-enhancing, risky projects. Furthermore, sorting firms by their financial constraint status fundamentally alters the structural dynamics of this relationship. In financially constrained firms, the relationship maintains its non-linear U-shaped trajectory. Conversely, in financially unconstrained firms, due to unhindered capital market access, the association manifests as a non-linear, inverted U-shaped pattern. Additionally, the results indicate that CSR, through both its first-order and second-order interaction effects, exerts a positive and statistically significant moderating influence on this network of relationships, strengthening the relationship toward optimal risk-taking behaviors.

Keywords

Main Subjects

Journal of Accounting Advances

Articles in Press, Accepted Manuscript
Available Online from 23 September 2026

Files

History

  • Receive Date: 01 January 2026
  • Revise Date: 01 August 2026
  • Accept Date: 02 September 2026

Share

How to cite

Statistics