Investigate whether financial conservative policies depend on Dissertation

Investigate whether monetary right policies depend on financial discommode - Dissertation ExampleThe literature review entrust understand at work already done in the argona and this along with an analysis of data depart be used to arrive at a conclusion. The paper also describes the research methodology that will be used in carrying out the study. Theoretical Framework Central to this investigation is to define grapple off and pecking order theories and the terms financial conservatism, financial distress and leverage. A sample of firms that adopts conservative policies as it relates to high levels of cash holdings and low levels of leverage will be identified and data relating to financial conservatism will be analysed. Trade-off theory predicts that when firms face high expected cost of financial distress and/ or attach a rather low value to interest tax shields, then, they will look to employ conservative financial policies (Minton and Wruck 2001). Pecking order theory pr edicts that firms use external financing only when infixed funds are insufficient to support discretionary expenditures. When internal funds fall short, managers look low gear to debt financing and only as a last resort do they turn to using beauteousness financing (Myers 1984). Definitions fiscal conservatism For the purpose of this study financial conservatism is defined as a persistent financial policy of low leverage and high cash holdings. Financial distress Financial distress is the inability to generate revenue when there are too many debts. Literature recapitulation Iona (2004) Berger et al (1997) suggests that managers tend to make more conservative capital structure decisions when are given the reason to use their discretion and are therefore free from disciplinal and monitoring mechanisms. The main motives behind the extract of conservative leverage policies are to reduce the probability of financial distress and bankruptcy and to resist disciplinary actions. Macki e-Mason (1990) used the modified Altmans (1968) Z-Score to test for the likelihood that a firm will experience financial distress. Similarly, Helwege and Liang 1996 and Graham (2000) have used this variable in their capital structure studies. They have found the Z-Score coefficient to be consistently positive and significant. This therefore, indicates that financially conservative firms are slight likely to face financial distress. Myers (1984) suggests that a firm may seek to maintain slack in the form of reserve borrowing advocate and target a level of borrowing that lies below its debt capacity. In doing so, the firm can issue skilful debt if it needs to avoid any material costs of financial distress. Titman (1984) and Graham (2000) identified industries in which firms are likely to experience significant costs of financial distress. The suggestion is that sensitivity distress results from high levels of on-going relationships with customers which results from warranties, repa irs and upgrades associated with the cut-rate sale of veraciouss in the computer labor, specialty manufacturing industry, the retail industry and the pharmaceutical/biotechnology firms. Minton and Wruck (2001) indicates that three (3) of the four (4) industry classification mentioned above are associated significantly with the probability of being financially conservative. Retail firms are less likely to follow policies of low leverage possibly because of the thinking that real estate serves as good collateral for borrowing purposes. Iona (2004) also