Frontiers in Business, Economics and Management 
ISSN: 2766-824X | Vol. 9, No. 1, 2023 

 

248 

Empirical	Study	on	the	Impact	of	Environmental	
Uncertainty	on	Dynamic	Adjustment	of	Financial	
Flexibility	
Xingyue Li 

Hunan University of Science and Technology, School of Business, Xiangtan, Hunan 411201, China 
 

Abstract: From the perspective of environmental uncertainty, this paper further studies whether the dynamic adjustment of 
the financial flexibility of enterprises will be affected by environmental uncertainty and its changes. Through the research, it is 
found that there is a reasonable level of target flexibility, and the actual financial flexibility of enterprises will constantly converge 
to the target. Environmental uncertainty will accelerate the dynamic adjustment of financial flexibility. The change in 
environmental uncertainty will also accelerate the dynamic adjustment speed of financial flexibility. It can help enterprises 
correctly understand financial flexibility, and then guide enterprises to make reasonable and effective financial decisions so that 
the financial decisions of enterprises are more scientific. 

Keywords: Environmental uncertainty, Financial flexibility, Dynamic adjustment. 
 

1. Introduction 
Along with the globalization of the world economy, 

especially China's increasingly prominent position in the 
World Trade Organization and the increasingly important role 
it is playing, thus making Chinese enterprises intermingle 
with the economic activities of other economic organizations 
in the world. Since the reform and opening up, our country 
has pursued a "going-out" development strategy economically, 
so that Chinese enterprises not only face their domestic 
consumption market, And for the whole world market, with 
enterprises around the world frequent trade and economic 
exchanges. At the same time, along with the conflicts and 
frictions which are becoming increasingly fierce in 
surrounding areas of our country, it has also caused a certain 
degree of a hindrance to the economic development of the 
region, which will have an impact on the strategic 
development and investment choice of Chinese enterprises. 
Environmental uncertainty has become an important feature 
in the era of economic globalization, and how enterprises deal 
with uncertainty has become an important topic in the current 
era. This paper is written based on this background. Through 
the analysis and research of relevant theories, it helps 
enterprises to correctly understand the dynamic adjustment of 
financial flexibility, so that enterprises can take this as the 
premise. Make decisions about financial management 
scientifically. 

2. Literature Review 
In 2010, Cook and Tang proposed that the adjustment speed 

of enterprise capital structure would be affected by the 
macroeconomic environment, and the capital turnover 
situation of enterprises would have a cross-effect on this 
impact[1]. Regarding the source of uncertainty, different 
experts and scholars hold different views. In general, the 
source of uncertainty is divided into the external and internal 
environment of the organization. Tung proposed that the 
source of uncertainty is external to the organization, and 
Milliken believed that it is a cognition of managers to the 
external environment, so it is internal[2][3]. In 2011, Byoun 

closely linked financial flexibility with environmental 
uncertainty and proposed that enterprises reserve financial 
flexibility to cope with environmental uncertainty, while 
DeAngelo and DeAngelo (2007) divided financial flexibility 
into cash flexibility, debt flexibility, and equity flexibility and 
proposed the theory of financial flexibility[4]-[5]. This lays 
the theoretical foundation for the study of financial flexibility. 

The research on environmental uncertainty and dynamic 
adjustment of financial flexibility mainly focuses on the 
following three aspects: First, it is about the concept, 
measurement, and impact of environmental uncertainty. 
Ducan (1972) comprehensively elaborated on three aspects of 
corporate decision-making. Environmental uncertainty is 
caused by the lack of relevant environmental information in 
decision-making, the inability to make clear decision results, 
and the inability to accurately predict the environment. In 
addition, when the external environment is more uncertain, it 
will have a negative impact on the enterprise, such as 
suppression of corporate innovation (Y. Ma et al., 2022), 
prompting the enterprise to increase equity investment and 
deteriorate the investment structure, thus causing the 
occurrence of 'funds being diverted out of the real economy' 
situation (M. Xing et al. 2022)[6][7]. 

Secondly, the concept of financial flexibility, measurement, 
and target financial flexibility-related research. Flexibility is 
the ability and state that enables things to adjust accordingly 
according to changes in the external environment. Flexibility 
and rigidity are two completely different concepts, while 
flexibility and elasticity. The concept is also very different. 
Firms can change their financial resilience by adjusting their 
capital structure and financing regime, and this change is 
usually quantifiable. DeAngelo and DeAngelo (2007) divided 
financial flexibility into cash flexibility, debt flexibility, and 
equity flexibility from the perspective of financial flexibility. 
For domestic-related fields, the study of financial flexibility 
started relatively late, the development of rapid, and in line 
with our country on the basis of the actual innovation. In 2011, 
A.M. Zeng and Y.L. Fu et al published an article on financial 
research to demonstrate the relationship between enterprise 
financing behavior, financial crisis impact, and financial 



 

249 

flexibility reserve, they used the multiple regression method 
for the first time to study the influence of pre-reserved 
financial flexibility of enterprises on their financing behavior 
under adverse environment[8]. However, it has not 
completely solved the problem of how to select appropriate 
financial policies and reserve financial flexibility 
appropriately. 

Finally, the research focuses on environmental uncertainty 
and financial flexibility. Studies on the relationship between 
the two are usually carried out based on the behaviors of listed 
companies, such as cash dividend distribution (K.L. Deng and 
M.X. Liu, 2013), mortgage financing (M.X. Liu and X.H. 
Xiang, 2014), corporate value enhancement (H.X. Tong, 2021; 
A.Q. Wang and W.P. Tang, 2017; R.H. Yang and Z. Huang, 
2016; C. Liu et al., 2016), R&D investment (F. Chen and X.Y. 
Han, 2018), diversification strategy (Y.M. Fu et al., 2019), 
etc[9][16]. At the same time, part of the research on the 
relationship between them takes environmental uncertainty 
and financial flexibility as moderating variables, so as to 
study the influence of their joint moderating effect on a series 
of corporate behaviors such as enterprise innovation (W.H. 
Wang et al., 2021; X.G. Wang and Y.H. Sheng, 2021; Y.M. 
Sun and G.T. Zhang, 2020[17][19]. 

3. Theoretical Analysis and Research 
Hypothesis 

3.1. Environmental uncertainty promotes 
dynamic adjustment of enterprise 
financial flexibility 

In the rapid development of the Internet era, enterprises are 
faced with increasing environmental uncertainty, which has 
an impact on the financial flexibility management of 
enterprises. In the process of operation and development, 
enterprises will inevitably face various uncertainties. For this 
reason, it is particularly important for enterprises to establish 
financial flexibility suitable for themselves and make timely 
adjustments according to the changes of environmental 
uncertainties. For enterprises, in the face of environmental 
uncertainties, if they want to survive and develop in the fierce 
competition, It is very necessary to adjust one's financial level 
at any time according to environmental changes. In general, 
the dynamic adjustment speed of the financial flexibility of 
enterprises will increase with the existence of environmental 
uncertainties. Therefore, the hypothesis proposed in this 
paper is as follows:  

Hypothesis 1: The dynamic adjustment speed of the 
financial flexibility of enterprises will increase with the 
increase of environmental uncertainty so that there is a certain 
positive correlation between them. 

3.2. The change of environmental uncertainty 
promotes the dynamic adjustment of 
enterprise financial flexibility 

According to the main content of hypothesis 1, it can be 
preliminarily judged that environmental uncertainty has a 
positive promoting effect on the dynamic adjustment speed of 
financial flexibility, but this hypothesis only takes the current 
environmental uncertainty as the starting point, that is, to 
study the static influence of environmental uncertainty on the 
dynamic adjustment of enterprise financial flexibility. 
However, the impact of any event is not limited to the current 
period, which indicates that we should pay proper attention to 

the dynamic impact, and further study the impact of the 
change of environmental uncertainty on the dynamic 
adjustment speed of financial flexibility. If the enterprise's 
financial flexibility dynamic adjustment speed is only 
affected by the uncertainty of the current period, The guiding 
function of enterprises is that only the current environmental 
uncertainties can be taken into account when making relevant 
decisions. Based on the above analysis, the hypothesis 
proposed in this paper is as follows:  

Hypothesis 2: The speed of dynamic adjustment of 
enterprise financial flexibility will increase with the increase 
of the change range of environmental uncertainty so that there 
is a certain positive correlation between the two. 

4. Research Design 

4.1. Model Construction 
On the basis of the above analysis, hypothesis 1 and 

hypothesis 2 are tested empirically. In this paper, after 
referring to the research results of Byoun (2008) and N. 
Xu(2016)[20], etc., a financial flexible part adjustment model 
(4-1) is constructed: 

 
 , , 1 i,t , 1 i,t*i t i t i tff ff ff ff               (1) 

 
Among them, i and t represent different enterprises and 

years respectively, ff represents the financial flexibility of the 
enterprise, and the regression coefficient λ called financial 
flexible adjustment speed leads to that goal. 0 <λ< 1, reflects 
the enterprise's actual financial flexible part of a year only can 
be adjusted to the target. Next, substitute the target financial 
flexibility fitting model (2) into the model (1) to obtain the 
model (3): 

 
, 1 2 3 4 ,* tan +i t i tff g lsize profit growth year industry             (2) 

 
 , , 1 1 2 3 4

,

+ 1- tan +i t i t

i t

ff ff g lsize profit growth

year industry

     


    

  
(3) 

 
In order to verify hypothesis 1 and hypothesis 2, this paper 

introduces environmental uncertainty and changes in 
environmental uncertainty based on model (3) and obtains 
model (4) and (5). 
 

 , 1 , , 1 , 1 1 1 2 1 3 1 4
,

1- + c tan +i t i t i t i t

i t

ff U ff Uc g lsize profit growth

year industry

          


     

  
(4) 

 
 , 2 , , 1 , 2 1 2 2 2 3 2 4

,

1- + c tan +i t i t i t i t

i t

ff U ff Uc g lsize profit growth

year industry

          


      

  
(5) 

 

4.2. Measurement and description of variables 
1. Explained variables 
ff represents the financial flexibility of an enterprise, which 

can be measured by the sum of debt flexibility and cash 
flexibility. This measurement method is based on the method 
adopted by A.M. Zeng et al. (2011).  

2. Explaining variables 
(1) Environmental uncertainty 
uc represents the environmental uncertainty of an 

enterprise. Based on the previous theoretical analysis, this 
paper adopts the standard deviation of the profit rate of net 
assets of a company in the recent three years to measure the 



 

250 

environmental uncertainty of an enterprise.  
(2) Changes in environmental uncertainty  
∆uc represents the change of environmental uncertainty, 

which is calculated by the difference between current and 
previous environmental uncertainty in this paper. When ∆uc 

is greater than zero, it reflects some extent that the 
environmental uncertainty faced by the enterprise in the 
current period is larger than that in the previous period. On 
the contrary, it reflects that the uncertainty of the current 
period is smaller than that of the previous period. 

 
Table 1. Variable definitions 

Variable property Variable name Variable symbol Variable calculation method 

Explained variable Financial flexibility ff Cash flexibility + debt flexibility 

Explanatory 
variable 

Environmental uncertainty uc 
Standard deviation of the company's net asset profit 

rate in the last three years 
Environmental uncertainty 

changes 
Δuc 

Current environmental uncertainty - Previous 
environmental uncertainty 

Control variable 

Tangibility of assets tang Total fixed assets/assets at year end 
Enterprise scale lsize Natural log of total assets at year end 

profitability profit Net profit/main business income 

Enterprise growth growth 
(end of year total assets - beginning of year total 

assets)/beginning of year total assets 
Year dummy variable year -- 

Industry dummy variable industry -- 
 

4.3. Data sources and descriptive statistics of 
variables 

The sample data in this paper is composed of A-share listed 
companies in Shanghai and Shenzhen. The financial report 
data and other related information used in this study are all 
from the RESSET. 

After a series of steps, a total of 14,231 sample data from 
2,033 listed companies from 2012 to 2018 were obtained in 
this paper. 

As can be seen from Table 2, the standard deviation of 
financial flexibility (ff) is 0.201, indicating that the data 
fluctuates to a certain extent. The stability of the financial 
flexibility reserve level of each enterprise is poor. The 
maximum value of financial flexibility (ff) is 0.756, and the 
minimum value of financial flexibility (ff) is -0.167. To some 
extent, it reflects that there are some differences in the 
financial flexibility reserves of Chinese enterprises, and there 
is a serious polarization phenomenon. 

 
Table 2. Descriptive statistics used to estimate target financial flexibility 

variables Sample size Mean value Standard deviation Minimum value Maximum value 
tang 14,231 0.219 0.163 0.00191 0.707 
lsize 14,231 22.16 1.194 19.78 25.63 
profit 14,229 0.0746 0.146 -0.678 0.513 

growth 14,218 0.193 0.392 -0.272 2.629 
ff 14,231 0.0932 0.201 -0.167 0.756 

 
By analyzing the data in Table 3, it can be seen that the 

standard deviation of enterprise environmental uncertainty 
(uc) is 8.679, indicating that the data fluctuates significantly, 
and the environmental uncertainty faced by enterprises is 
severely polarized, with the maximum value being 252.3 and 
the minimum value being 0.0124. To some extent, it reflects 

that there are some differences in the environmental 
uncertainties faced by Chinese enterprises, and the mean of 
the environmental uncertainties is 4.918, which further 
reflects the significance of the impact of environmental 
uncertainties. 

 
Table 3. Descriptive statistics of model variables of financial flexible adjustment speed 

variables Sample size Mean value Standard deviation Minimum value Maximum value 
uc 14,231 4.918 8.679 0.0124 252.3 
△uc 12,198 -0.127 6.977 -192.6 156.6 

 
The standard deviation of environmental uncertainty’s 

change (∆uc) is 6.977, which also reflects the large fluctuation 
of environmental uncertainty change faced by Chinese 
enterprises and the serious polarization of environmental 
uncertainty change situation faced by enterprises. The 
maximum value is 156.6, the minimum value is -192.6, and 
the mean value is -0.127, indicating that with the continuous 
improvement of the Chinese capital market, the 
environmental uncertainty faced by enterprises has improved, 
but the timely reserve financial flexibility adopted by 
enterprises to cope with environmental uncertainty still needs 
to be strengthened to cope with the changing business 
environment. 

5. Empirical Test of The Influence of 
Environmental Uncertainty on 
Dynamic Adjustment of Financial 
Flexibility 

5.1. Analysis of regression results 
5.1.1. Regression analysis of influence of environmental 

uncertainty on dynamic adjustment of enterprise 
financial flexibility 

 
 



 

251 

Table 4. Regression analysis of dynamic adjustment speed 
of environmental uncertainty and financial flexibility 

variables (1) (2) (3) 

ffi,t-1 
0.722*** 
(91.99) 

0.426*** 
(50.50) 

0.722*** 
(81.27) 

uc*ffi,t-1 
-0.003*** 

(-3.53) 
-0.001** 
(-2.15) 

-0.003*** 
(-3.61) 

uc 
0.001*** 

(4.37) 
0.001*** 

(5.69) 
0.001*** 

(4.88) 

tang 
-0.048*** 

(-7.67) 
-0.200*** 
(-13.62) 

-0.048*** 
(-6.71) 

lsize 
-0.012*** 
(-11.74) 

-0.038*** 
(-13.06) 

-0.012*** 
(-9.95) 

profit 
0.115*** 
(12.89) 

0.119*** 
(15.05) 

0.115*** 
(13.10) 

growth 
-0.013*** 

(-2.82) 
0.001 
(0.40) 

-0.013*** 
(-2.95) 

_cons 
0.309*** 
(13.38) 

0.909*** 
(13.87) 

0.291*** 
(10.58) 

year control control control 
industry control control control 

Sample size 12,198 12,198 12,198 
Adj-R2 0.712 0.284 . 

F 737.3 573.9 . 
Number of code 2,033 2,033 2,033 

Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1 
 

In this paper, the Hausmann test and other methods are used 
to identify the three models, and it is concluded that the fixed 
effect model is the best choice. Therefore, the output results 
of the fixed effect model are used as the basis for the 
corresponding analysis. Table 4 shows that the regression 
coefficient of ffi,t-1 is 0.426. According to the meaning set by 
the coefficient in the model, it can be concluded that 
0.574+0.001uc is the dynamic adjustment speed of the 
enterprise's financial flexibility. On this basis, the mean value 
of environmental uncertainty is brought into the results, and 
the dynamic adjustment speed of financial flexibility is 57.89% 
after calculation. However, this value was 57.40% before it 
was brought in, indicating that environmental uncertainty has 
a positive promoting effect on the dynamic adjustment speed 
of financial flexibility. The empirical result shows that the 
dynamic adjustment speed of corporate financial flexibility 
increases with the increase of environmental uncertainty, and 
hypothesis 1 is valid. 

5.1.2. Regression analysis of the influence of 
environmental uncertainty changes on the dynamic 
adjustment of corporate financial flexibility 

Table 5 reports the results of multiple regression analysis 
of the model (5), and verifies hypothesis 2 to test whether the 
hypothesis is valid. This paper first uses appropriate methods 
to identify the use of models. After fully comparing the fitting 
effects of mixed effects, fixed effects, and random effects 
models, this paper considers the fixed effects model as the 
best choice, so this paper makes a corresponding analysis on 
this basis. It can be seen from Table 5-2 that the coefficient of 
ffi,t-1 is 0.405, and the dynamic adjustment speed of financial 
flexibility is 0.595+0.007△uc according to the setting 
meaning of the model coefficient, which also indicates that 
the dynamic adjustment speed of financial flexibility of 
enterprises increases with the increase of the change range of 
environmental uncertainty. Hypothesis 2 is validated. 

 
 
 
 

Table 5. Regression analysis of the change of 
environmental uncertainty and the dynamic adjustment 

speed of financial flexibility 

variables 
Mixed 

regression 
Fixed effect model 

Random effects 
model 

ffi,t-1 
0.704*** 
(96.07) 

0.405*** 
(31.71) 

0.704*** 
(81.39) 

△uc*ffi,t-1 
-0.002** 
(-2.49) 

-0.007*** 
(-5.64) 

-0.002** 
(-2.56) 

△uc 
0.001*** 

(3.45) 
0.000*** 

(3.03) 
0.001*** 

(3.75) 

_cons 
0.319*** 
(13.65) 

0.952*** 
(9.15) 

0.302*** 
(10.88) 

control Yes Yes Yes 
year control control control 

industry control control control 
Sample size 12,198 12,198 12,198 

Adj-R2 0.711 0.408 . 
F 730.2 313.3 . 

Number of 
code 

 2,033 2,033 

Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1 

5.2. Robustness test 
In order to ensure more stable and reliable empirical results, 

the robustness test of the reduced sample and the financial 
flexibility threshold test was carried out to verify the 
robustness of the model. 

 
Table 6. Robustness test results of reduced samples 

variable
s 

(1) (2) 
(3) (4) 

ffi,t-1 
0.372*
** 

(15.79) 

0.351*
** 

(15.05) 

0.419*
** 

(49.60) 

0.398*
** 

(30.76) 

uc*ffi,t-1 
-

0.003** 
(-2.40) 

 
-

0.001** 
(-2.08) 

 

uc 
0.001*
** 
(2.60) 

 
0.001*
** 
(5.62) 

 

△uc*ffi
,t-1 

 
-

0.003** 
(-2.29) 

 -
0.008*** 

(-5.77) 

△uc  
0.000*

* 
(2.10) 

 0.000 
(1.49) 

_cons 
0.787*
** 
(5.91) 

0.842*
** 
(6.27) 

0.826*
** 

(13.62) 

0.862*
** 
(8.94) 

control Yes Yes Yes Yes 
year control control control control 

industr
y 

control control 
control control 

Sample 
size 

6,108 6,108 
12,198 12,198 

Numbe
r of code 

1,018 1,018 
2,033 2,033 

Adj-R2 0.232 0.231 0.267 0.394 
F 59.89 59.51 540.3 285.4 

Robust t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1 

5.2.1. Financial flexibility threshold test 
According to the robustness test results in Table 6, there is 

no significant difference between the robustness test results 
of the reduced samples and the threshold test results of 
financial flexibility and the empirical results. Therefore, it can 
be determined that the hypothesis that environmental 
uncertainty and its changes have a positive promoting effect 



 

252 

on the dynamic adjustment speed of financial flexibility is 
valid. That is, the dynamic adjustment speed of financial 
flexibility will increase with the increase of environmental 
uncertainty and its range of change. 

6. Research Conclusion and Suggestion  

6.1. Research Conclusions 
Through the study of the above chapters, the research 

conclusions of this paper are as follows: The enterprise has a 
reasonable level of target flexibility, and the actual financial 
flexibility of the enterprise will constantly converge to the 
target. Environmental uncertainty will accelerate the dynamic 
adjustment speed of financial flexibility. The change in 
environmental uncertainty will accelerate the dynamic 
adjustment speed of financial flexibility.  

Through the above research and analysis, the following 
enlightenment can be provided for the operation and 
management activities of enterprises: Improve the ability of 
enterprises to cope with environmental uncertainties. 
Enterprises are faced with more and more environmental 
uncertainty factors, and only the competitiveness of 
enterprises can be improved qualitatively. Only in this way 
can enterprises maintain their own development and growth 
in times of economic turbulence. Further, improve 
enterprises' attention to financial flexibility reserves. 
Enterprises should pay more attention to financial flexibility 
reserves. Enterprises should have and maintain the ability to 
timely mobilize financial resources, and grasp enough 
financial resources to tide them over when facing risks. 
Enterprises should further analyze and understand the 
environmental uncertainty and its changing trend, and 
rationally allocate financial resources. Enterprises should not 
focus on the current period in the decision-making process, 
but should also establish a tracking mechanism for 
environmental uncertainty changes, so as to achieve 
comprehensive consideration. 

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