A new study uncovers the critical role that firm flexibility plays in CFO decision making during and post-pandemic

I do not typically present two consecutive posts on the same topic, but I will make an exception this week. Earlier this week, I reviewed research on the pandemic’s impact on corporate managers. Today I highlight a new paper (still in draft form) from John W. Barry (Duke), Murillo Campello (Cornell), John R. Graham (Duke), and Yueran Ma (Chicago) that presents an analysis of the pandemic’s impact from the perspective of corporate Chief Financial Officers (CFOs). Read together, the papers provide two views of the same phenomenon: one from frontline managers and the other from senior-most financial executives whose decisions helped shape the world ever since the crisis began.

A key conceptual element of this second study is the authors’ decision to base their analysis on flexibility and the role that it played in decision-making. In finance, flexibility refers to the ability of a firm to respond quickly (and in value-maximizing ways) to unexpected changes in the firm’s cash flows or investment opportunities. The authors expand the concept of flexibility for this paper along three specific dimensions:

1) Financial flexibility: the degree to which a firm has access to internal and external capital during a crisis

2) Workplace flexibility: the degree to which a firm can shift the physical location of its work

3) Investment flexibility: the degree to which a firm can accelerate or delay capital investment decisions

The researchers’ goal in this particular study is to show how each of these kinds of flexibility plays a role in shaping corporate planning in the COVID-19 crisis and how they interact.

The Study

For their analyses, the researchers relied on both pre-existing and new data. Their starting point is the results of a CFO survey conducted by Duke University in early 2020. The Duke survey asked CFOs various questions concerning their projected growth in revenue, employment (domestic full-time employees), and capital expenditures (spending on structures and equipment). To complement the Duke data, the authors asked 520 private and public sector CFOs to assess their firms’ level of financial flexibility using a five-point scale (0-None, 1-A little, 2-3-4-Moderate, 5-A lot). The results obtained from this CFO group set a baseline reaction at the start of the crisis. The authors continued to survey CFOs in June, September, and December of 2020 to track the trajectory of business plans for 2020 and, importantly, provide information on companies’ long-term planning post-COVID.

To analyze workplace flexibility, the authors collected data on employees’ ability to work remotely by calculating the fraction of employees in each industry who can and do work. They used data from the U.S. Bureau of Labor Statistics’s (BLS) American Time Use Survey (ATUS). They also performed additional tests using pre-pandemic industry data about work-from-home (WFH) capabilities and compared it with new WFH statistics that the BLS began to release in May 2020. Workplace flexibility is a topic with an established research history, because of the topic’s importance to labor economists who study how employees balance work and home life. 

The team used information from the 636 U.S. companies that responded to the 2019 version of the Duke survey to measure investment flexibility. Among other matters, the survey collected data on firms’ flexibility in investment implementation by asking, “How flexible is the speed at which you complete your largest capital investment project? (0-Very flexible; 1-Flexible; 2-Somewhat flexible; 3-Neutral; 4-Somewhat inflexible; 5-Inflexible; 6-Very inflexible).” 

In explaining their motives for analyzing flexibility in three dimensions, the researchers note the following:

More financial flexibility, such as having more cash available, relaxes firms’ funding constraints and supports more employment and investment. Workplace flexibility helps firms stay productive during the COVID emergency, reducing health risks from traditional in-person work and boosting employment. Investment flexibility allows firms that are experiencing adverse conditions and production difficulties to defer capital expenditures during COVID (or accelerate investment if conditions are favorable). Notably, workplace flexibility and investment flexibility may affect the marginal returns of production and shape managers’ plans even if firms are not financially constrained.

Lastly, after the March 2020 survey, the authors conducted additional surveys in June, September, and December of 2020 in collaboration with the Federal Reserve Banks of Atlanta and Richmond. The September survey asked CFOs when they expect various labor and spending amounts to return to pre-COVID levels, and the December survey explored CFOs’ outlook on future automation investment.

In considering the design of this study, one of its more interesting features is the search for the relationships that exist among the three dimensions of flexibility in a time of crisis. For example, if low workplace flexibility results in lower productivity (as it did with COVID-19), then firms will rightly decrease or even halt hiring and capital investment. The more quickly a firm is able to make these adjustments, the better its in-crisis financial performance should be. Moreover, because the COVID-19 outbreak was an unanticipated and unprecedented emergency, the authors believe that their flexibility measures better account for how decisions are made in the “real world” and across various industries.

The Findings

1. Financial Flexibility

From their research, the authors found that greater financial flexibility was associated with higher planned employment and capital expenditure growth in 2020. Moreover, the impact of financial flexibility on employment is significantly stronger for firms with higher fixed costs. In other words, if a company’s costs are mostly fixed, then while revenue may decline in a crisis, costs do not. In this case, having access to cash may be necessary to cover any high fixed costs. In contrast, if a company’s costs are flexible, then it can reduce production in a crisis (i.e., if revenues and costs go down), for there is less need for extra cash. It is no surprise, then, to find that, with all else being equal, firms with low financial flexibility expect “7 to 9 percentage point lower growth of employment and capital expenditures in 2020.”

2. Workplace Flexibility

In looking at the second dimension, the authors found that higher workplace flexibility is connected with significantly higher levels of hiring during the 2020 pandemic. Specifically, firms at “the 75th percentile of the fraction of employees who can work from home expect 3 to 4 percentage point higher employment growth than those at the 25th percentile.” Simply put, a higher level of workplace flexibility made companies more likely to increase headcount during the pandemic. However, higher workplace flexibility does not directly translate into higher capital expenditure. This evidence, the authors hypothesize, could indicate that at firms where WFH is easier, CFOs may prefer new forms of investment rather than traditional capital expenditures.

The researchers also found that while companies with a flexible workplace can more easily exploit higher levels of investment flexibility, companies with low workplace flexibility frequently had to reduce or delay capital spending.

3. Investment Flexibility

As noted above, the role that investment flexibility has played during the crisis is more nuanced than the other two dimensions, though it is intimately connected to the issue of workplace flexibility. The authors found that among firms with low workplace flexibility (implying more challenging operational conditions), those with high investment flexibility expected capital investments to fall in 2020 by approximately 10% on average. On the other hand, firms with low workplace flexibility and low investment flexibility expected only a relatively small (4%) capital expenditure growth in the same time frame. In contrast, among firms with high workplace flexibility (a possibility when operational conditions are less challenging), those with higher investment flexibility planned to invest more during the pandemic. Put simply, on the one hand, CFOs at companies that could not flex work and workers often found it necessary to cut investment. On the other hand, CFOs at companies that could flex work and workers increased investment in 2020, in line with their respective degree of workforce flexibility.


In summing up the practical implications of this paper, one of its key findings is that firms’ responses to the 2020 pandemic may have accelerated changes in how companies invest. Notably, CFOs at companies with high workplace flexibility expected employment to recover more quickly, capital spending to grow more slowly, and WFH to persist beyond the pandemic. This finding suggests to the authors that these CFOs may steer away from investing in traditional physical assets, preferring instead to investing in their workers and in other assets that facilitate flexible collaboration.

Ominously for some workers, however, firms with lower workplace flexibility are more likely to see automation as key to their future, meaning that low-skill workers are more likely to be displaced after the pandemic. This strategic shift in CFO thinking may safeguard their firms for the future, but the prospect of increased automation will certainly pose new, long-term challenges for many workers in the post-COVID economy.  

A final key point is that the authors compared their pandemic findings with CFO reactions during the Great Recession. In their analysis, the authors found that financial flexibility appears to have much the same impact on employment and investment decisions in both crises. In contrast, while workplace flexibility was basically a non-issue in 2008’s finance-driven crisis, it has been central to CFO decision-making in 2020’s health-driven crisis. Consequently, what emerges from this paper is a sense that the dynamics of the COVID-19 crisis — the first major health-driven economic disruption of the modern era — suggest that a future pandemic should be seen differently from the traditional economic downturns that all economies face from time to time. Specifically, the strong link established between workplace flexibility and investment decisions poses new questions for policymakers. When firms lack financial flexibility (2008), monetary and fiscal moves by the government can alleviate the crisis. However, when workplace flexibility is the biggest constraint facing CFOs (2020), traditional government solutions may not be of much help.

If the conclusions noted above are correct, governments will have to invent new mechanisms and strategies to deal with a future crisis created not by economic cycles or market dynamics but by novel forces that displace work and workers. After all, while the cause of the current crisis was an invisible virus, the cause of the next one could easily be an extreme weather event that displaces a large part of the national workforce — an event that may be as hard to imagine in 2021 as COVID-19 was in 2019.

The Research

Barry, John W. and Campello, Murillo and Graham, John Robert and Ma, Yueran, Corporate Flexibility in a Time of Crisis (June 11, 2021). Available at SSRN: https://ssrn.com/abstract=3778789 or http://dx.doi.org/10.2139/ssrn.3778789


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Posted by:Carlos Alvarenga