Discuss the financing hierarchy view of corporate liquidity Essay

Discuss the financing hierarchy view of corporate liquidity - Essay Example Considering this relationship predicted by the hierarchy view, it is different from the trade-off view which argues that the relationship between the level of cash and investment maintained by an entity is direct. The hierarchy view also holds that firms raise their levels of cash reserves when they are confident about their future profitability and the fact that new opportunities will require excessive cash reserves (Tirole 2006). The empirical evidence in relation to the corporate policies on liquidity, based on the survey conducted by Deutsche Bank (2006), suggests that a significantly high level of companies surveyed, i.e. 18 percent, maintained liquid cash reserves which were more than 20 percent of their assets, whereas 38 percent survey participants had established credit lines over and above 20 percent of their assets’ value. On the other hand, one interesting finding from the survey revealed that about 50 percent of the participants signified their indifference towards changing liquidity position, had there been no new opportunities in the market (Servaes and Tufano 2006). Thus, holding of cash cannot be deemed for availing new investment opportunities and this is where empirical evidence departs from hierarchy view of corporate liquidity