Financial Conservatism. Determinants of cash and leverage Dissertation

Financial Conservatism. Determinants of cash and leverage - Dissertation Example 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. ... 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. What’s more, most of the studies that have dealt with this area have been concentrated on the US firms, hence making it important to investigate w hether the puzzle regarding decisions of firms in relation to financial conservatism extends to the UK firms. As such, this study will focus on the UK firms especially because it is commonly known for observance of extreme debt conservatism, considering UK firms have the lowest leverage ratio, weighed against to other developed countries (Rajan and Zingales, 1995). This study will use leverage of firms or cash holdings to determine whether the firms are finically-conservative. The objective of this paper is to carry out an empirical study on the debt policies adopted by the UK firms, which particularly focus on the factors that influence large cash reserves and extremely low leverage. In effect, the paper will attempt to find answers to a number of research questions. First and