Electric Utility Industry Enterprises Risk Sensitivity & Financial Liquidity Decisions: The Case of Elektrownia Chorzów S.A.
17 Pages Posted: 16 Jul 2012 Last revised: 29 Jul 2012
Date Written: July 15, 2012
Financial liquidity in enterprise is maintained and managed for risk reduction purposes. Liquidity management should contribute to realization of the fundamental enterprise aim that is maximization of owner wealth. The enterprise owner wealth maximization strategy is executed with a focus on risk and uncertainty. The paper presents the consequences that can result from operating risk that is related to liquidity policy in the context of electric utility industry firms. An increase in the level of liquid assets in an enterprise increases both net working capital requirements and the costs of holding and managing financial liquidity. Both of these decrease the value of the firm. But not always it works in the same way, it depends on risk sensitivity of the business which differ between branches and individual representatives from each branch. Case study data presents and is an material for discussion about general model presented in first part of the paper. The relation between liquid levels and risk sensitivity is also illustrated by empirical data from electric utility industry empirical data.
Keywords: owner wealth, liquidity, cost of capital, enterprise value
JEL Classification: G32, G31, D24
Suggested Citation: Suggested Citation