Financial flexibility: Do firms prepare for recession?

We analyze how firms manage their financial flexibility conditional on the expected probability of recession. Using an ex ante measure of future recession, we find that, in the aggregate, firms do not appear to prepare. However, a closer analysis reveals a more nuanced relation. The lack of preparation in aggregate is driven by firms that may be unable to prepare: financially constrained and cash poor firms. We find some evidence that firms able to prepare, unconstrained and cash rich firms, may prepare for future recessions. (C) 2011 Elsevier B.V. All rights reserved.