cash holding

Topics: Finance, Corporate finance, Investment Pages: 4 (974 words) Published: April 10, 2014


Prepared By
Pranshu Singh

Submitted to: -
Prof. Naveen Kumar


Stock market performance in high and low cash holding firm depends on the determinants of corporate cash holdings that have occupied a central place in corporate finance literature. Cash holding, according to Gill and Shah (2012) is defined as cash in hand or readily available for investment in physical assets and to distribute to investors. Cash holding is therefore viewed as cash or cash equivalent that can be easily converted into cash. In this context, cash holding will include cash in hand and bank, short time investment in money market instrument such as treasury bills. Holding cash is at a cost, which is the opportunity cost of the capital invested in liquid assets. The potential profit declined on holding large cash balance is an opportunity cost to the firm. Adetifa (2005) observes that the costs of cash holding are of two categories: cost of excessive cash holding such as opportunity cost of interest foregone, costs of purchasing power among others and cost of inadequate cash holding including cost of corporate image, loss of cash discount on purchases and loss of business opportunities. The company cash holding determinants have since been a subject of explanation in the framework of three theories, namely: the Trade-off Model, Pecking Order Theory and Free Cash Flow Theory. According to tradeoff theory, they set their optimal level of cash holding by weighing the marginal costs and marginal benefits of holding cash (Afza & Adnan, 2007). The side effect of his suggestion has excluded the necessity of maintaining optimum cash holding. Pandey (2006) emphasizes that firm should maintain optimum cash holding. How to determine the optimum cash holding is a major concern for the financial manager...
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