Financial Flexibility and the Impact of the 2007/2008 Global Financial Crisis: Evidence from African Firms

Moshi James


The objective of this studyis to test the financial flexibility of firms in the period before, during andafter the 2007/2008 global financial crisis andto understand the impact of this crisis on the financially flexible firms ascompared to their peer, less financially flexible firms. Financialflexibility is measured using the Altman Z-scoreindex, using cash and cash equivalents ratio, the retained earnings ratio, theearnings before interest and tax ratio, the market to book value ratio, and thesales ratio. A firm was regarded as being financially flexible if its Altman Z-score is equal or above 2.675, and as lessfinancially flexible otherwise. The sample period is from 2004-2004 divided into 3 phases, i.e. the pre-crisis period(2004-2006), the crisis period (2007/2008), and the post-crisis period (2009-2013). The results show that about 42firms (48.83%) of all the sampled firms were financially flexible before theonset of the global financial crisis. However during the crisis, 11 firms equal 26.19% of flexible firms lost their flexibility status while fivemore (12%) became less financially flexiblein the period following the crisis. These results,therefore, provides evidence thatthe global financial crisis had a negativeimpact on the financial flexibility of firms, causing financially flexiblefirms to decrease at an average of 38% from42 in the pre-crisis period to 31 in the post-crisis period. The originality of theauthor’s approach is to evaluate the financial flexibility of firms listed inthe Sub-Sahara Africa by applying the Altman z-score measure. Keywords:keywords, financial flexibility, global financial crisis,Altman’s Z-scores

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