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Financial Conservatism. Determinants of cash and leverage - Dissertation Example
The meaning of the term financial conservatism can be understood in different contexts, depending on the variable used in categorizing the financially conservative entities. Many of the studies classify this concept using either cash holdings or leverage of a firm…
In this analysis, both cash conservative and leverage conservative firms will be taken into account. The essence of investigation of the two policies at the same is to find out if a firm can use leverage conservative policy in the place of cash conservative policy or vice versa. From the earlier analysis, the key reason why firms are motivated to adopt conservative financial policies is to protect them from the cost that is associated with missed out investment opportunities. The analysis of the literature will reveal that firms tend to maintain large cash reserves or do away with their debt capacity to make sure that they do not miss out investment opportunities. It is not rare to find firms exercising both policies simultaneously, though it is difficult to establish the reasons why they do so. All in all, according to major theoretical frameworks of capital structure, it is strange to find a firm that adopts high leverage policy having high cash balances in their capital structure. For instance, according to the pecking order theory, firms tend to result to eternal financing only after exhausting their internally available funds.
Many researchers have covered this area of financial conservatism, especially regarding the rationale behind different accumulation of huge amounts of cash and cash equivalents as well as the repercussions of such policies (Ozkan & Ozkan, 2004; Mikkelson & Partch, 2003). However, the determinant of cash and leverage conservatism in UK firms has not been focused on. ...