Value Maximizing Corporate Current Assets and Cash Management in Relation to Risk Sensitivity: Polish Firms Case

Abstract

The paper reports the way of working Financial Liquidity Investment Efficiency Model (FLIEM). It’s an author proposed approach to predicts the most accurate from firm maximization point of view cash management and current assets management policy. The novelty of the proposed approach is linked with including the idea of risk sensitivity into model. Current assets and cash in enterprise are maintained for risk reduction purposes. The basic financial purpose of an enterprise is maximization of its value. Cash and current assets management should also contribute to realization of this fundamental aim. The enterprise value maximization strategy is executed with a focus on risk and uncertainty. This paper discuss the consequences that can result from operating risk that is related to cash and current assets management policy. An increase in the level of current assets in a firm increases both net working capital requirements and the costs of holding and managing working capital. Both of these decrease the value of the firm. But not always it works in the same way, it depends on risk sensitivity. Collected data shows how the Polish firms liquidity management model works in emerging markets reality. In the paper the relation between liquid levels and risk sensitivity is illustrated by empirical data from Polish firms.

Keywords: liquidity, cost of capital, firm value

JEL Classification: G32, G31, D24