Abstract
<title>Abstract</title> <p> This study investigates the effect of financial flexibility on investment decision of the Sri Lankan listed consumer services companies. It is based on the financial flexibility, capital structure, liquidity and financing constraints literature that suggests that firms with larger liquidity and unused borrowing power are better positioned to make investments when they occur. The study uses data from the financial statements of 30 listed consumer services companies during 2010–2025 and defines three measures, cash flexibility, unused debt capacity and composite financial flexibility index. Corporate investment is defined as scaled capital expenditure, using total assets lagged one year as the scale. The empirical analysis is based on one-year lags of the explanatory variables, firm and year fixed effects and robust standard errors. The results indicate that financial flexibility that lags investment has a positive and significant effect on investment. In isolation, unused debt capacity has a positive and statistically significant effect on investment, as does cash flexibility, though not statistically significant. This indicates that, beyond cash holdings, financial flexibility facilitates investment mainly through conservative leverage and spare borrowing capacity. But, no crisis interaction effects are significant across the various crisis definitions, suggesting that financial flexibility did not improve during the crisis years. The investment cash flow sensitivity model also does not imply that increased financial flexibility leads to a decrease in reliance on internal cash flow. Findings are resilient to different investment measures, winsorization levels and Driscoll-Kraay standard errors. The study provides frontier market evidence from Sri Lanka, and finds unused debt capacity to be the more relevant channel for investment support. <bold>JEL Classification:</bold> G31, G32, M41 </p>