Capitalizing on risk: How corporate financial flexibility, investment efficiency, and institutional ownership shape risk-taking dynamics

In this study, we test the influence of financial flexibility [FF] on corporate risk-taking [RT], a crucial aspect of firm strategy and performance. In the volatile financial landscape of emerging markets like China, understanding how FF affects risk behavior is essential. Using data from 3571 Chinese listed firms spanning 2014 to 2023, we address this gap by exploring how FF impacts RT and the moderating roles of investment efficiency [INE] and institutional ownership [INO]. Our study employs dynamic panel generalized method of moments [GMM] and a new bias-corrected method of moments to offer robust insights. We find a significant positive correlation between FF and RT. Additionally, IE and INO significantly moderate this relationship, with RT notably amplified when FF exceeds industry- and year-adjusted averages. Interestingly, during exceptional periods, such as the COVID-19 crisis, the impact of FF on RT becomes insignificant. This study offers novel insights into the role of FF, IO and INE in risk management and provides valuable policy recommendations for stakeholders navigating high-risk investments. • Financial flexibility significantly boosts risk-taking behavior. • Investment efficiency moderates the impact of financial flexibility on risk. • Institutional ownership adjusts the effect of financial flexibility on risk. • Greater financial flexibility drives significant increases in risk-taking. • COVID-19 dampens the risk-taking driven by financial flexibility.