Evolution mechanism of financial flexibility in listed firms based on dynamic capital structure adjustment

This study investigates how listed firms cultivate and deploy financial flexibility as they dynamically adjust toward target capital structures. Using a balanced panel of 1,200 non-financial firms from 2010 to 2024, we construct a composite flexibility index based on cash reserves, net debt capacity, and equity issuance potential. Through dynamic panel estimations, we find that firms close approximately 32.4% of their leverage gap annually on average, with adjustment speeds varying significantly by flexibility level and composition. High-flexibility firms adjust faster (mean 39.7%) and more consistently, while cash-dominant firms exhibit the highest stability in leverage correction. Flexibility composition also shifts across firm life-cycle stages: early-stage firms rely on cash (49.54%) and equity issuance (20.32%), while mature firms depend more on net debt capacity (54.37%). Moreover, during macroeconomic shocks such as COVID-19, high-flexibility firms sustain higher capital expenditure levels and suffer smaller declines in adjustment speed. These findings confirm that financial flexibility is not only a buffer against shocks but also an active accelerator of structural rebalancing. The study highlights flexibility as a path-dependent capability that evolves with firm maturity and governance, offering insights for capital strategy under uncertainty. Implications extend to managers and policymakers seeking to enhance resilience without compromising growth trajectories.