Cash holdings, capital structure and financial flexibility

Chua, Shen Hwee (2012) Cash holdings, capital structure and financial flexibility. PhD thesis, University of Nottingham.

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This thesis is structured into two main parts to investigate the role of financial flexibility in firms’ liquidity and financing management. Financial flexibility is the most important practical determinant to managers when they make financing decisions. This missing link, financial flexibility, is identified by practitioners and used in this thesis to fill the missing gap between theory and practice in corporate finance. Part A of this thesis analyses the trends in firms’ internal financial flexibility and examines the role of this internal flexibility on investment behaviour of firms. Part B of this thesis then move on to examine the role of both internal and external financial flexibility on firms’ financing behaviour.

Part A examines the relationship between debt capacity and cash as part of firms’ internal financial flexibility. Firms use both debt capacity and cash holdings for their internal flexibility management; and debt capacity is used here to explain the trends observed in cash holdings. Debt capacity is the most important determinant of cash holdings and has better ability to predict cash level compared to conventional cash determinants. Together, both debt capacity and cash contribute to firms’ internal financial flexibility and are able to explain most of firms’ investment behaviour, even during a recession period.

Part B examines the role of financial flexibility in capital structure decisions. Financial flexibility is measured internally as cash and debt capacity, and externally as equity liquidity using a novel external equity flexibility index based on common equity liquidity measures. The conventional pecking order and trade-off models are used to measure the impact of financial flexibility on firms’ capital structure. The pecking order theory is contingent upon firms’ internal flexibility – debt capacity. Finally, supporting the notion that financial flexibility is the most important consideration in financing decisions, debt capacity and external equity flexibility are shown to be the most important determinants of leverage.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Newton, D.
Liu, W.
Keywords: Business enterprises, finance, cash management
Subjects: H Social sciences > HG Finance
Faculties/Schools: UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
Item ID: 12600
Depositing User: EP, Services
Date Deposited: 31 Aug 2012 12:35
Last Modified: 15 Dec 2017 12:53

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