Target Liquid Balances and Value of the Firm

Zagreb International Review of Economics & Business, Vol. 12, No. 1, pp. 1-18, 2009

19 Pages Posted: 16 May 2011

See all articles by Grzegorz Michalski

Grzegorz Michalski

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics

Date Written: December 14, 2009

Abstract

Many of the current asset management models that are found in financial management literature assume book profit maximization as the basic financial purpose. These book profit-based models could be lacking in what relates to another aim (i.e., maximization of enterprise value). The corporate value creation strategy is executed with a focus on risk and uncertainty. Firms hold cash for a variety of different reasons. Generally, cash balances held in a firm can be called considered, precautionary, speculative, transactional and intentional. The first are the result of management anxieties. Managers fear the negative part of the risk and hold cash to hedge against it. Second, cash balances are held to use chances that are created by the positive part of the risk equation. Next, cash balances are the result of the operating needs of the firm. In this article, we analyse the relation between these types of cash balances and risk. This article presents the discussion about relations between firm’s net working investment policy and as result operating cash balances and firm’s value. This article also contains propositions for marking levels of precautionary cash balances and speculative cash balances. Application of these propositions should help managers to make better decisions to maximize the value of a firm.

Keywords: corporate value, investments, current assets, working capital, value based management

JEL Classification: G32, G11, P34

Suggested Citation

Michalski, Grzegorz, Target Liquid Balances and Value of the Firm (December 14, 2009). Zagreb International Review of Economics & Business, Vol. 12, No. 1, pp. 1-18, 2009. Available at SSRN: https://ssrn.com/abstract=1841812

Grzegorz Michalski (Contact Author)

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics ( email )

ul. Komandorska 118-120
Wroclaw, 53-345
Poland

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