Corporate Cash holding Essay Example | Topics and Well Written Essays - 1500 words

Corporate Cash holding - Essay ExampleThe suitability of a new model must be determined before carrying forth any tests owing to the complex nature of the measurements involved. The correlations will need to be carried out between loss make and dividend payouts as well as between loss dummy and firm size and positive relationships will need to be determined (see Appendix 4 for reference). This means that large firms are more likely to be without loss while also managing to pay dividends, an observation launched with the results obtained by most researchers and providing evidence that the loss dummy variable bottom of the inning function as a proxy for financial restraints.In line with the otherwise various researchers, we found out that firms which incur a loss, most of the times hold more property than financially stable firms. Further examination into the correlation between loss dummy, the investment opportunity and cash flow volatility, we were able to found out that a neg ative correlation exists between loss dummy and the investment opportunity as well as a negative correlation between loss dummy and cash flow volatility. From this examination we can assume that financial constraints (loss dummy=0) have a positive relationship with cash flow volatility investment opportunity set (see Appendix 5). fiscal constrained firms should hold some cash so that they are able to invest in investment projects which are profitable.The estimate models show us that cash flow volatility does in fact affect a firms cash holdings. Cash volatility differs from industry to industry and in order to depict this, we add a dummy variable, industry, into our model so as to determine the differences in cash holdings in each industry. The variable for industry, I, shall be use in out sample meaning that for the 32 industries listed in the London Stock Exchange, we would need to create 21(k-1) dummy variables.According to the results of the test, we can see that non all dummy variables are of significance. The ones that