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

Topics: Investment, Asset, Generally Accepted Accounting Principles Pages: 4 (1251 words) Published: August 12, 2010
International Journals Review

Journal Review #1

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

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 are considered as the firm’s hard contract as they will be in violation of contract if the coupon payments are not made on time. On the other hand the common stocks and the preferred stocks are considered as the soft contract as the payout in such cases can be suspended on unfavorable situations. Meeting the hard contracts will be the more important thing every case. A firm is in financial distress at a given period of time if its current assets such as cash and marketable securities are not enough to meet the current liquidity requirements of the hard contracts. So the mechanism of avoiding the financial distress depends on whether to increase or better the firm’s current liquid asset or try to remove the hardness of the contracts as much as possible.

In the journal the author construct two hypothesis where H1: “The proportion of liquid asset invested liquid asset (cash and marketable securities) will be increasing in costs of financial debt” and H2: “The proportion of debt in the capital structure of a firm will be decreasing in its cost of financial distress”.

Journal Review #2

Liquidity and Firm Investment Outlays
Norman V. Breknner
If own assets are sold to pay down debt then the value lost...
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