Accounting Measures of Corporate Liquidity, Leverage and Costs of Financial Distress

1244 Words Aug 5th, 2010 5 Pages
International Journals Review
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Journal Review #1

Accounting Measures of Corporate Liquidity, leverage and costs of financial distress.
Teresa a john

Synopsis:
When the cost of financial distress is high in a firm that firm may maintain a large amount of its total asset as liquid asset and be careful on taking debt. This journal has talked about the relation on the financial distress the cost of corporate liquid policy and the leverage policy of the firm. Liquid asset constitute a significant portion of the total asset of the major corporations of U.S. Using different proxies to direct and indirect cost at different financial distress the relationship between corporate liquidity is examined.

The bondholder’s coupon debt claims
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Firm’s investment outlays may depend on its liquidity to some extent. This journal has focused on finding the link and established a clear relation. Investment expenditure was positively related to firm’s liquid asset holdings for both a three year period of moderate income decrease and a two year period of very quick income turn down. No single relationship was located for the two-year interval.

The marginal rate of risk rises with the amount invested because of different unfavorable outcome. Additional loans are changed with the rise in marginal risk. This is similar to the rising marginal cost of output. However, the more amount invested the less is the marginal risk as it implies less danger to the wealth of creditors and the firms. Therefore, the firm’s investment depends hugely on the size of the firm’s asset. A relationship between the firm’s investment outlays and liquidity under uncertainty is consistent with the analysis of the variation of it. But in the event of loss utility of the investor depend on the net liquidity position as low liquidity position of an investor may force him to liquidation of his inventories and other current assets.

A quite different line of argument may suggest there is a positive relationship between liquidity and investment. The firm may act as if it has past pattern of receipts or assets that has allowed it to keep a low ratio of liquid to capital asset. In such cases firms will invest low asset and rebuild liquidity. On the