Literature Review

[Name of the institute]Literature Review

The term “literature review” implies review and evaluation of the existing studies and available information related to the topic of research. Paula (2010) iterates that literature review is the objective evaluation of the existing body of information and data (Paula, 2010). When a researcher begins the journey to reveal unexplored elements and new facets, then in this journey, reviewing the literature acts as an itinerary. Similarly, conducting the process of review of literature is also imperative for this study. The following part of the paper mentions vital information that is reviewed.

2.1 Cash Holdings

One of the curious facts that one can observe in the financial market is that some of the organizations prefer to hold cash of an amount that exceeds the value of the market of firm. There can be variegated reasons because of which an organization prefers to hold cash. If we consider the reason behind holding cash then with the assumption of the perfect world it can be considered as a strategy so that the value of the firm can be maximized. On the basis of the evaluation of the probable and likely usage of funds investors assign a certain value to these cash holding when the do the valuation of the firm. Before discussing this concept about cash holdings in great depth it is imperative to understand the basic concept of cash holding.

Cambridge Business English Dictionary describes the concept of cash holding as the amount of money that a firm or an individual keeps available so that it can be spend rather than investing it in some projects (Cambridge Business English Dictionary, 2013).

Cash holding can further be described as the assets that an organization prefers to hold in ready cash as compared to invest it in property and other assets or to pay it out in the form of bonds and dividends.

2.2 Cash Holding Theories

There are three expedient theories with regard to cash holdings. These theories are Trade-off Theory, the Pecking Order theory and agency theory. These three theories encompass views about levels and policies of cash holdings.

2.2.1 The Trade off Theory

This theory puts forward the notion that the maximum liquidity presents a trade off between the costs of holding cash and benefits of holding cash. There are few evident benefits of cash. These evident benefits include reduction in exposure to the financial distress, it does not disrupt policies related to investment under financial constraints and cost of raising funds externally or cost of liquidation of assets lower down as a result of holding cash. However, the cost that is incurred by an organization if it decides to hold the cash involves the opportunity cost that the organization could invest in liquid assets (Ferreira and Vilela, 2004).

2.2.2 The Pecking Order Theory

The Pecking Order Theory that was put forwarded by Myers and Majluf in the year 1984 is based on an assumption. This assumption is about the capital structure of a firm. This theory assumes that the capital structure of a ...