The relationship between business strategy and bankruptcy risk: does financial flexibility matter? Evidence from a developing market

This study examines the relationship between business strategy and bankruptcy risk. In addition, it investigates the moderating role of financial flexibility in this relationship by bringing evidence from an emerging Asian market. Our sample consists of nonfinancial companies listed on the Saudi Stock Exchange from 2010 to 2019. The data was analyzed depending on Pearson correlation analysis, two independent sample t-test, OLS regression and OLS with robust standard errors clustered by the firm. We found that firms with a business strategy are less likely to face bankruptcy risk. After considering the moderating role of financial flexibility, we found that financial flexibility increases bankruptcy risk in the case of firms with a cost leadership strategy. In contrast, financial flexibility reduces the possibility of bankruptcy risk in the case of firms with a product differentiation strategy. Our findings can support emerging markets’ investors in their investment and lending decisions as they present beneficial insights into a company’s performance as informed by the effectiveness of its strategy, anticipated risks and financial flexibility. Moreover, the findings can guide regulators in revising corporate governance regulations or financial flexibility standards, which is vital to mitigate bankruptcy risk in developing economies.