Investing In Liquid Or Non Liquid Assets - Free Essay Example

CHAPTER 1: Liquidity was found to be one of the most important unresolved problems in the field of corporate finance (Brealy and Myers, 1996). In addition, the same studies found that the liquidity management was the pinpoint of determining both future investment opportunities and future capacity of external borrowing. Firms, in general, invested in the most liquid assets. Liquid assets made up a considerable segment of total capital or assets and had the more important implications for the risk and profitability of firms (John, 1993). For instance, according to Kim, Mauer, and Sherman (1998), the average ratio of cash plus marketable securities to total assets (Liquidity) was 8.1% during the period of 1975 to 1994 of a sample of 915 industrial firms of the United States of America. Kim et al. (1998) analyzed both the costs and benefits of holding the liquid assets and concluded that the investment in liquid assets (e.g., Treasury Securities) was more costly because by investing in liquid assets, the firms accepted opportunity cost of investing in less liquid and more rewarding assets; furthermore, the firms also bear transaction costs of trading financial securities. But firms managed significant and predictable amounts of excess liquid asset holdings because of the capital market imperfections provided a strong logic to maintain some excess liquidity to tackle some emergencies. Huberman (1984), Ang (1991), and Myers and Rajan (1995) had noted that liquid assets might prompt more severe agency problems than less liquid assets. Specifically, if and only if the external financing was costly, the investment in liquid assets was the most advantageous reply to having to seek costly external financing to fund future production needs or investment opportunities and the costs of external financing included the direct expense to issue securities, the costs arising from potential agency conflicts, and costs arising from the adverse selection problems attributable to asymmetric information (Smith, 1986). Thus, investment in surplus liquidity can be viewed as a cost-effectively rational way to reduce the firms reliance on costly external financing. Obviously, any such remuneration must be balanced against the holding costs that liquid assets force on the firm. Liquid assets earned a low rate of return as compared to the less liquid asset s. However, the firms despite decided to hold a positive amount of liquid assets provided undecided future in-house funds and costly external financing. Hence, it was concluded that there was a tradeoff between the holding cost of liquid assets (a low rate of return) and the benefit of minimizing the need to seek costly external financing if internally generated funds were insufficient to finance future investment opportunities. According to Horne and Bowers (1968), liquidity can be expressed as the ability to realize value in an accepted means of exchange. Being the acceptable means of exchange, money was the most liquid asset and was also a benchmark against which the value of other type of monetary assets was compared as to its degree of replacement. In addition, liquidity had two dimensions: the one was the time required to convert the asset into money, and the other was the certainty of the price realized, i.e., the stability of the exchange ratio between the money and the a sset. In the business world, there was the high corporate demand for liquidity and firms in the real, financial and industrial sectors managed its liquidity needs in the numerous ways in order to carry out further production and investment plans efficiently without being stopped by impermanent liquidity deficiencies. The firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ decisions regarding the future ability to avail financial funds was affected by several key factors such as the capital structure set deadlines for settling the amounts to investors, corporations did not invest all of its resources in the most profitable, long term projects and in fact they also invested funds in less profitable liquid assets, the corporations engaged in the risk management and derivatives were used to evade the particular risks (such as rate risk, exchange rate risk, etc.), and lastly, international risk burden was also measured by the companies. (Holmstrom and Tirole, 2000) 1.2 Problem Statement In the corporate finance, the liquidity was considered to be one of the most important issues. The main objective behind the study of the corporate liquidity was that this was the most important issue for the present firms to either invest in the more liquid assets or to invest in the less liquid assets. Furthermore, investment in liquid assets was prompted by several other factors such as the future investment opportunities and future uncertain cash flows and the external costly financing. Contrastingly, the investment in less liquid assets attracted the corporations because of the high rate of return of such investments. The purpose of the study was to notice whether the financial factors explained in detail by Kim and David and Ann (1998), and John (1993), present the detail regarding the choice of the firm to invest in liquid or non liquid assets in Pakistan. The scope of study was to analyze the distinctive financial factors which affected the firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ decisi ons to place their funds in more liquid assets and on the basis of firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ financial factors, the research study determined the choice of investing in liquid assets or the choice of having internal liquidity. 1.3 Hypotheses A central query in front of firms which needed new finance to invest in operational activities was whether to use internal funds generated through the most liquid assets or to raise the costly external financing. Various factors impacted the decision regarding the decision to invest in liquid assets (liquidity). The firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s characteristics had the great importance in selection of the investment decisions; these characteristics were firm size, operating income to sales ratio, operating income to total assets ratio, market to book ratio, inventory plus gross fixed assets to total assets ratio, log natural of annual sales, total debt ratio, and long term debt ratio. Many authors as Kim and David and Ann (1998), John (1993) discussed these characteristics in research. The hypothesized relationship of these listed factors with liquidity is provided below: H1: There is negative impact of Firm Size on Liquidity. H2: There is negative impact of Total Debt Ratio on Liq uidity. H3: There is negative impact of Long-Term Debt Ratio on Liquidity. H4: There is positive impact of the ratio of the Market to Book Value of Equity on Liquidity. H5: There is positive impact of the ratio of Operating Income to Sales on Liquidity. H6: There is negative impact of the Operating Income to Total Assets ratio on Liquidity. H7: There is negative impact of the ratio of Inventory plus Gross fixed assets to Total Assets on Liquidity. H8: There is positive impact of sales of firms on liquidity. 1.4 Outline of the Study The research structured as follows. Chapter one was based on the introduction of the thesis, which consists of the some introduction of the liquidity by different authors, the statement of problem, scope and objectives, hypothesis etc. Chapter two consisted of literature review given by different authors, theories on liquidity and factors affecting the choice of decision to invest in more liquid assets or not. Chapter three described methodology which is composed of justification of the selection of the variables utilized in analysis sample, the data, technique and hypothesis, also estimate model utilized in analysis. In chapter four, analyses of the results were there which were taken after the data processing. Chapter five contained the final results, conclusions and recommendations. References were included in chapter number six. CHAPTER 2: LITERATURE REVIEW When a firm wanted to invest in a project or production facilities, there was a question before the firm that it should use its own funds or retained earnings or raise an external financing. The firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s answer to this question did not affect the wealth of security holders in the world of Miller and Modigliani (1961) where the capital markets were perfect. However, among other things, the capital market perfection means the absence of liquidity problems. Resultantly, all assets can be exchanged for cash and vice versa and that exchange was made at the market value and it does not entail a loss. (Huberman, 1984) The real markets were not quite perfect and one can see a variety of reasons about it. Consider the example of firms wishing to finance new projects by issuing claims on the projects. If the firms knew more about the projects than the outside world knew and the claims were considered risky, a market collapse may take place (Ackerlof, 1970). If the firms bel ieved their projects were good, will perceive that their claims were undervalued by the market and will not issue such claims and only the projects of pessimistic firms will be financed (Huberman, 1984). Finally, it was the best option that a firm used its own liquid assets to invest quickly without going to the capital market under certain circumstances. Hence, it was the most desirable that a firm possesses the excess liquid assets in the real world of capital markets imperfection (Huberman, 1984). There was a vast literature available on the liquidity and one of the most prominent theories of liquidity is the Liquidity Preference Hypothesis (LPH). 2.1 Liquidity Preference Hypothesis (LPH): The Liquidity Preference Hypothesis (LPH) gave details that the return on government securities was a monotonically rising function of the time to maturity. That was, restricted on all on hand information, the probable monthly return on a T-bill with one year to maturity should surpass the probable monthly return on a six month T-bill, which should be better than the sure yield on a one month T-bill, and so on. Regardless of the shape of the term structure or any other economic variables contained in the agentà ¢Ã¢â€š ¬Ã¢â€ž ¢s information set, the LPH meant this condition. The underlying intuition behind the LPH was that the longer term bonds are riskier; that was, they were more susceptible to the fluctuations or volatility in interest rate than the shorter term bonds and the individuals needed to be compensated for the risk of holding these bonds, hence, the higher predicted yield. (Boudoukh, and Richardson, and Smith, and Whitelaw, 1999) The LPH did not worry about the choi ces investors made between the whole variety of financial assets, on the one hand, and other broad classes of assets, on the other. LPH took as given the choices determining how much wealth was to be invested in financial assets and concerned itself with the distribution of these amounts among cash and substitute financial assets. An issue can be identified here; that is, why should any balances be held in cash, in preference to other financial assets? The author distinguished two possible sources of liquidity preference, while recognizing that they were not mutually exclusive. The first was inelasticity of expectations of future interest rates. The second was insecurity about be future of interest rates. (Tobin, 1958) Tobin (1958) argued liquidity preference as the theory of most advantageous portfolio masterpiece in a two-asset (money, bonds) world in which one asset (money) was riskless in his original paper. The basic conclusion of Tobinà ¢Ã¢â€š ¬Ã¢â€ž ¢s theory of liquidity preference and portfolio choice rested on the properties entitled to these  µ-à ¡Ã‚ »? curves. According to Lachmann (1937), in current literature there appeared to be present a reasonable amount of conformity among writers that uncertainty had to be looked upon as the foremost determinant of movements in the size of cash balances, i.e., as the main cause of liquidity preference. At more rapidly scrutiny, though, this noticeable agreement came out as to some extent full of twists and turns, because diverse writers gave this word a different meaning. In the following, it was only restricted to the assessment of two examples of monetary theories in both of which the most important role was allocated to uncertainty, and it was found based on the research that in each case the word had a different meaning. After that, the results of the critical assessment of these theories will be used in the best way with the intention to find that meaning of à ¢Ã¢â€š ¬Ã…“uncertainty wh ich will enable the research study to regard it as the cause of liquidity preference. Uncertainty was but one of a lot of grounds of liquidity preference. Possibly the failure of the author to set up a causal association between uncertainty and liquidity preference was due to the authorà ¢Ã¢â€š ¬Ã¢â€ž ¢s having used the word uncertainty in too broad and too indefinite a meaning. The endeavor to ascertain a causal association between uncertainty and liquidity preference had up to now driven out to be an absolute failure. Wells (1983) had publicized that want for liquidity was an indispensable economic reaction to the not able to be understood and considerably variegated future which always lied to the front. Liquidity was valued in an indecisive world because it afforded economic units the preference of not entirely host aging their own economic future to the uncertain future of the economy. Its ownership provided businesses and households the elasticity to reorganize their econo mic plans, to redistribute their wealth as the future slowly opens out and becomes the past, as acquaintance was gained with the simple passage of time. In short, this was Keyness (1937) theory of liquidity preference. And from just this explanation it can be simply understood why his hypothesis, as it was remade by subsequent generation of writers, turned out to be detached from Keyness (1937) unambiguous acknowledgment of the central significance of time and uncertainty, of liquidity and liquidity preference. The disconnection came about largely because the fact that our information of the future was unpredictable, indistinguishable, and doubtful demonstrated to be a perception far too short lived to support contemporary quantitative model building research. Keyness concepts were real, but they were necessarily so unclear and imprecise that model builders could not well integrate these phenomena into their analytics. Kaldor (1981, 1982) for instance observed that the stress on liquidity preference as a theory of the demand for money had made an immense contribution to the accomplishment of monetarism. As long as the demand for money could be shown statistically to be less than perfectly elastic and the supply of money to be determined independently enough from the demand, the supply of money was the major determinant of economic activity. This investigation presented here puts emphasis that liquidity preference was a theory of the desire to hold short- versus long-term assets and that the state of liquidity preference was presided over primarily by the productivity of business. (Mott, 1985-1986) According to the Keynesà ¢Ã¢â€š ¬Ã¢â€ž ¢s liquidity preference theory, the authorities achieved their objectives, which the author understood to be set with respect to the level of the interest rate, against the background of liquidity preference. The interest rate was changed not only by varying the rate at which the central bank was all set to discount (Bank rate), but also by open market operations: sale or purchase of securities between the central bank and the other market members. According to Reilly and Brown (2005), the theory of Liquidity Preference hold that the higher returns must be given on the long term investments than the shorter ones because some of the yields and returns to invest in the short term investments were given up by the investors in order to avoid the greater price fluctuations of the securities having longer life. Another way to interpret the liquidity preference hypothesis was to say that lenders preferred short term loans, and, to induce them to lend long term, it was necessary to offer higher yields. The liquidity preference theory was also called the Term Premium Theory and it asserted that uncertainty and volatility caused investors to favor short term issues over bonds with longer maturities because short term securities were less volatile and can easily be converted into predictable amounts of cash should unforeseen events occur. This theory argued that the yield curve generally sloped upward and that any other shape should be viewed as a temporary deviation. To see how the liquidity preference theory predicted the future yields and how it compensated with the pure expectations hypothesis, to predict future long term rates from a single set of one year rates: 6 percent, 7.5 percent, and 8.5 percent. The liquidity preference theory suggested that investors added increasing liquidity premiums to the successive rates to derive actual market rates. As an example, investors might arrive at rates of 6.3 percent, 7.9 percent, and 9.0 percent. As a matter of the historical fact, the yield curve showed an upward bias, which implied that some combination of the liquidity preference theory and expectations theory will more accurately explain the shape of the yield curve than either of them alone. Specifically, actual long term rates consistently tended to be above what was envisioned fr om the price expectations hypothesis. This tendency implied the existence of a liquidity premium. The liquidity premium was provided to compensate the long term investor. CHAPTER 3: RESEARCH METHODS 3.1 Method of Data Collection Data was collected from Karachi Stock Exchange KSE 100 Index as given by State Bank of Pakistan in publication Balance Sheet Analysis of Joint Stock Companies Listed on the KSE (2003-2008). The period of study covered six years, 2003-08. The opted sample size of 70 non financial firms was taken from KSE 100 Index and all of the non financial firms listed on KSE 100 Index were selected for the samples which were either manufacturing firms or service providing firms excluding the financial firms. The objective behind the exclusion of the financial firms from the sample was that liquidity impact of the financial firms and non financial firms was entirely different. 3.2 Sample Size A sample of 70 non financial firms from KSE 100 Index was taken. Only firms were used in the samples which were only the non financial firms which included the industrial firms and service providing firms listed on the KSE 100 Index form 2003-2008. The impact of the different financial factors on the liquidity was analyzed on all of the non financial firms selected as the sample. 3.3 Research Model Developed There were various financial factors of the non financial firms which affected the liquidity of the firms. This research study analyzed the impact of different factors on the liquidity. The factors, their relation with the liquidity, their measurement formula and the hypothesized relationship with liquidity were discussed below following the discussion after à ¢Ã¢â€š ¬Ã‹Å"Liquidityà ¢Ã¢â€š ¬Ã¢â€ž ¢. 3.3.1 Liquidity According to Horne and Bowers (1968), Liquidity can be expressed as the ability to realize value in an accepted means of exchange. Being the acceptable means of exchange, money was the most liquid asset and is also a benchmark against which the value of other type of monetary assets was compared as to its degree of replacement. In addition, liquidity has two dimensions: the one was the time required to convert the asset into money, and the other was the certainty of the price realized, i.e., the stability of the exchange ratio between the money and the asset. Kim and David and Ann (1998), and John (1993) both measured the liquidity as the ratio of cash and marketable securities to total assets. 3.3.2 Firm Size and Liquidity Recent research showed that small firms were more likely to face borrowing constraints than large firms Gertler and Hubbard (1988), Whited (1992), and Fazzari and Petersen (1993). In addition, Barclay and Smith (1996) argued that the cost of external financing was smaller for larger firms because of scale economies resulting from a substantial fixed cost component of security issuance costs. H1: There is negative impact of firm size on liquidity. 3.3.3 Total Debt Ratio and Liquidity The firms debt ratio was expected to be negatively related to liquid assets. There were at least two reasonable reasons. Baskin (1987) argued that as the firms debt ratio increased, the cost of funds used to invest in liquidity increased thereby reducing funded liquidity. Additionally, John (1993) argued that firms with access to debt markets-as proxied by the debt ratio-can use borrowing as a substitute for maintaining a stock of liquid assets. Firms with ready access to debt markets and other sources of borrowing can also use debt as a substitute for liquidity maintenance. H2: There is negative impact of total debt ratio on liquidity. 3.3.4 Long Term Debt Ratio and Liquidity Baskin (1987) argued that as the firms long term debt ratio increased, the cost of funds used to invest in liquidity increased thereby reducing funded liquidity. Additionally, John (1993) argued that firms with access to debt markets-as proxied by the long term debt ratio-can use borrowing as a substitute for maintaining a stock of liquid assets. Firms with ready access to debt markets and other sources of borrowing can also use debt as a substitute for liquidity maintenance. H3: There is negative impact of long term debt ratio on liquidity. 3.3.5 Operating Income to Total Assets and Sales Ratio and Liquidity According to John (1993), similarly, operating incomes or cash flows provided a ready source of liquidity. Firms with ready access to debt markets and other sources of borrowing can also use debt as a substitute for liquidity maintenance. Therefore, firms with good operating incomes (OI/S or OI/TA) or ready sources of financing (proxied by measures of debt) can afford to keep lower levels of liquidity. Hence, liquidity ratios (LIQR) would be lower for firms with higher operating incomes. H4: There is negative impact of operating income to total assets ratio on liquidity. H5: There is negative impact of operating income to sales ratio on liquidity. 3.3.6 Inventory and Gross Plant and Equipment to Total Assets Ratio and Liquidity Another measure of the liquidity costs of asset restructuring was the collateral value of the assets Shleifer and Vishny (1992). Titman and Wessels (1988) suggested proxies for the collateral value. The ratio of inventory plus gross plant and equipment to total assets (IGP/TA) was positively related to collateral value. The liquidity costs of asset restructuring were negatively related to collateral value. A firm with assets of high collateral value needed only to maintain low levels of liquidity. In other words, the liquidity measures will be decreasing in IGP/TA. H6: There is negative impact of inventory and gross plant and equipment to total assets ratio on liquidity. 3.3.7 Market to Book Ratio and Liquidity Myers (1977) argued that risky debt financing may engender sub- optimal investment incentives when a firms investment opportunity set included growth options. Managers acting on behalf of equity holders may fail to exercise profitable investment options because debt captured a portion of equity holders return in the form of a reduction in the probability of default. The firm can reduce the risk of financial distress and thereby mitigate the incentive to under invest in growth options by maintaining excess liquidity. This view also predicted a positive relation between corporate liquidity and the market-to-book ratio. H7: There is positive impact of market to book ratio on liquidity. 3.3.8 Sales and Liquidity According to John (1993), the variable sale was one of the control variables to account for the level of liquidity justified by transaction and precautionary motives. The variable sales proxy for the transaction needs of the firm. H8: There is positive impact of sales on liquidity. The model developed was a linear model and its specifications are provided below: LIQR = a0 + a1FIRM + a2DEBT + a3LTD + a4LSALES + a5OI/S + a6OI/TA+ a7 IGP/TA+ a8Market to Book Ratio + ц LIQR = the sum of cash and marketable securities divided by total assets FIRM = natural log of the book value of total assets DEBT = the ratio of shorter period plus longer period debt to total assets LTD = the ratio of longer period debt to total assets LSALES = natural log of the annual sales OI/S = the ratio of operating income to sales OI/TA = the ratio of operating income to total sales IGP/TA = the inventory plus gross fixed assets to total assets ratio à Ã¢â‚¬Å¾ = the error term The proposed relationship of the independent variables on liquidity is summarized in the below table: TABLE 3.1 : Relationship between Independent Variables and Liquidity  Firm Size Debt LTD OI/TA OI/S IGP/TA Market to Book Sales Liquidity negative negative negative negative positive negative positive positive 3.4 Statistical Technique Multiple Linear Regression Analysis (MLR) technique was used for this research study to examine the impact of the distinctive financial characteristics of the non financial firms on their liquidity of the selected firms; Statistical Package for the Social Sciences (SPSS) was used for the examination of the secondary data. Multiple Regression Analysis technique was used for the purpose of prediction of the decision of the non financial firms to invest in the liquid assets or not. The selected technique was used to study the impact of the different independent variables (financial factors as listed in the previous chapters) on the dependent variable i.e., liquidity. The multiple regression analysis was selected for this study because the multivariate analysis was more suitable than univariate investigation. In such a way; to openly taking into consideration, the interaction between multiple regressing variables, the study included the derivation of the linear regression function. It showed the intensity of the impact on liquidity during year 2003-2008 on the basis of several independent variables. CHAPTER 4: RESULTS The sample of 70 non financial firms from the Karachi Stock Exchange KSE 100 Index was taken; Multiple Regression Analysis (MLR) technique was used for this research study. Researcher examined the distinctive financial characteristics of non financial firms which invest in the more liquid assets. The selected technique was used to study the impact of the different independent variables (financial factors as listed in the previous chapters) on the dependent variable i.e., Liquidity. 4.1 Findings and Interpretation of the results Initially, the regression technique was applied on the data collected using SPSS. It was obvious from the results that there was the existence of strong multicollinearity among the predictors of the liquidity and this implies that there was strong interrelationship present among the independent variables. Hence, the results generated through SPSS were purely biased. In addition, there was the absence of the normality among the variables. Due to non normality, the results were not providing the true picture of the impact of the different predictors on the study variable. While resolving the problem, it was noticed that the main cause of the multicollinearity among the predictors was due to the two independent variables including firm size and annual sales. So, annual sales variable was removed from the analysis of the impact of different factors on liquidity. Hence, the multicollinearity issue was resolved. In resolving the issue of normality, various transformations were appl ied on the variable in order to normalize the variable so that the results could be more reliable; and accurate outlook of the true picture of liquidity can be made. Ultimately, all the issues were successfully resolved which were creating hindrances in the way of accuracy of results. Now, proceeding with the analysis of the results because the data was normal and there was also no multicollinearity issue in the data. The interpretation and analysis is presented in the next sections of this research study. TABLE 4.1 : Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .724a .524 .439 .06894 Table 4.1 showed the summary regarding the regression model. The R square of 52.4% in the above table showed that the all the predictors of liquidity combined together explained 52.4% variation in the dependent variable and the remaining variation was unexplained or latent predictors were not included in the model. TABLE 4.2 : ANOVA Model Sum of Squares Df Mean Square F Sig. 1 Regression .204 7 .029 6.141 .000a Residual .185 39 .005   Total .390 46    The table 4.2 checked the significance of the linear regression model in such a way that the reliability of the data file regarding the applicability of the regression technique can be understood from the above table; however, ANOVA table was reliable test of checking the linear regression modelà ¢Ã¢â€š ¬Ã¢â€ž ¢s ability to explain any variation in the dependent variable of liquidity. This was perfectly obvious from the sig value of .000 which meant that the linear regression model was highly significant for the data collected for the research study conducted. TABLE 4.3 : Coefficients Model Unstandardized Coefficients Standardized Coefficients t Sig. Collinearity Statistics B Std. Error Beta Tolerance VIF 1 (Constant) .379 .146  2.597 .013   Debt Ratio .053 .450 .018 .119 .906 .515 1.942 Long-Term Debt Ratio .718 .842 .138 .854 .398 .466 2.148 Operating Income to Total Assets Ratio .718 .967 .144 .742 .462 .325 3.072 Square Root of Operating Income to Total Sales Ratio .449 .389 .202 1.154 .255 .397 2.519 Square Root of Inventory plus gross plant and equipment to total assets -.823 .168 -.648 -4.891 .000 .696 1.438 Natural Logarithm of Market to Book ratio .001 .017 .010 .066 .948 .534 1.871 Firm Size .000 .009 .000 -.001 .999 .858 1.166 In the table 4.3, the final model of regression included only one independent variable which was square root of inventory plus gross fixed assets to total assets ratio. This was included in the model because this was the only variable which was highly significant in playing a vital role in explaining the variation in the dependent variable of liquidity ratio. In short, these results were not consistent with the results of Kim and David and Ann (1998), and John (1993). The other independent variables were not significant in explaining the variation in the dependent variable of liquidity ratio because firstly, the economic and the financial environment was different; secondly, the behavior of the non financial firms was not same as that of the foreign firms in regard of liquidity; and lastly, the decisions of the firms regarding the portion of their investments in liquidity were affected by the political situation and the security threats of Pakistan. 4.2 Hypotheses Assessment Summary The hypothesis of the study was distinctive financial factors had significant impact on the non financial firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ decision to invest in more liquid assets. These financial characteristics were market to book ratio, inventory plus gross fixed assets to total assets ratio, operating income to sales ratio, firm size, operating income to total assets ratio, total debt ratio, long term debt ratio, and natural log of sales. In this study each of the financial characteristic of non financial firms was tested and concluded the results. TABLE 4.4 : Hypotheses Assessment Summary S.NO. Hypotheses ÃŽÂ ² t SIG. RESULT H1 There is negative impact of Total Debt Ratio on Liquidity. 0.053 0.119 0.906 Rejected H2 There is negative impact of Long-Term Debt Ratio on Liquidity. 0.718 0.742 0.398 Rejected H3 There is positive impact of the market to book ratio on Liquidity. 0.001 0.66 0.948 Rejected H4 There is positive impact of the ratio of Operating Income to Sales on Liquidity. 0.449 1.154 0.255 Rejected H5 There is negative impact of the Operating Income to Total Assets ratio on Liquidity. 0.718 0.742 0.462 Rejected H6 There is negative impact of the ratio of Inventory plus Gross fixed assets to Total Assets on Liquidity. -0.823 -4.891 0.000 Accepted H7 There is positive impact of firm size on liquidity. 0 -0.001 0.999 Rejected H8 There is positive impact of sales on liquidity. Rejected CHAPTER 5: DISCUSSIONS, CONCLUSION, IMPLICATIONS AND FUTURE RESEARCH 5.1 Conclusion It was concluded based on the results of this research study that inventory plus gross plant and equipment ratio was only the independent variable which was showing significance in Pakistani market. And the remaining independent variables could not explain the variation in liquidity. These results were not matching with the study conducted by Kim and David and Ann (1998), and John (1993). These results were varying because in various countries, the macroeconomic conditions and the financial environment were entirely different from each other and in addition, the security problems and political situation also affected the liquidity and firms made decision accordingly. 5.2 Discussions Firm size could not play a significant role in defining the liquidity in this research thesis and this was also the case with the research study conducted by Kim and David and Ann (1998) because in their study the firm size was not playing a significant role. The variation in the liquidity was not explained by the market to book ratio while it was significant in the study done by Kim and David and Ann (1998). The operating income to sales ratio, operating income to total assets ratio, debt ratio, long term debt ratio, and sales were not significantly explaining the variation in the liquidity and study analyzed by John (1993) provided different results from that of the results concluded by this research thesis. 5.3 Implications and Recommendations This research was limited to the various firms listed on Karachi Stock Exchange of Pakistan only. The data taken from 70 non financial firms which were took through various sectors of the KSE 100 Index for the year 2003-08. It suggested that such type of study should be carried out in other countries of Asia as well, as to have comprehensive idea about the choices of the firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ decision to invest in liquid assets. Moreover, it also suggested that other factors except ones examined in this study should be researched as to have perfect idea about the selection of liquidity decisions. Besides that, this study can also be replicated in other developing countries. 5.4 Future Research This study helped various investors, management and other research conductors in analyzing and observing the behavior of firms regarding their decisions to invest in liquid assets. Research students who want to work further on liquidity can be benefited by this research study. Further more, the non financial firms will become advantageous from this study because the study clarified the distinctive characteristics of different firms which significantly explained the variations in the liquidity.

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Csr in Apple Inc free essay sample

Corporate social responsibility (CSR) has been highly regarded by most corporations. However, the exact reason why corporations implement CSR initiatives is often very vague and confusing to others. This paper will explore in depth how international corporations are motivated to incorporate CSR into the business strategies and how they deal with it. Based on academic references, the report firstly outlined the CSR background as well as some theory and key debates about CSR. Then, the methodology was summarized. After that, the case study of Apple Inc.  was used to demonstrate the reasons for implementing CSR initiatives in depth. Following that, the types of dilemmas the company faced, the CSR approach and tactics it used were analyzed. Finally, a conclusion was drawn at the end of the paper. 2 CSR Background 2. 1 Definition of CSR In accordance with European Commission (2001), the modern corporate social responsibility (CSR) is â€Å"a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. † However, there are some changes in the meaning and practice of CSR concept. (Lee, 2008) 2. 2 Evolution of CSR The roots of CSR concept can be traced to the 1930s. (Friedman and Miles, 2006) However, the modern CSR concept originated in the 1950s in the US, and came to be prevalent in the early 1970s. (Srivastava, 2012) In the 1950s, Bowen (1953) defined CSR as â€Å"the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our societyâ€Å". The CSR literature of the definition expanded significantly during the 1960s with Keith Davis’ definition of CSR as referring to â€Å"businessmen’s decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interest. â€Å"(Davis, 1960) Meanwhile, McGuire (1963) stated that corporations have certain responsibilities to society which extend beyond economic and legal obligations. Business and social interest came closer and firms became more responsive to their stakeholders in the 1970s and 1980s. The 1970s was the decade in which CSR, responsiveness and performance became the center of discussions (Carroll, 2010), while the focus became fostering ethical corporate cultures in the 1980s. (Frederick, 2008) From the 1990s, CSR became almost universally approved and was coupled with strategy literature. Also, the importance of CSR is definitively realized. (Moura-Leite, 2011) 2. 3 Emergence of CSR CSR tends to be a strategy to face the threats of some global issues such as scarce resources, poverty and inequity, global warming and pollution while promoting the development of organizations. According to Wilson (2003), the implement of CSR initiatives leads to corporate sustainability. Also, the enhanced corporation reputation and global image earned from the implement of CSR activities provide organizations with an economic thrust to embrace the whole corporate sustainability trend as a strategic management model. (Dodiya, 2011) Due to these benefits, CSR has continued to grow in importance and emergence over the decades. 3 Literature Review 3. 1 Carrolls CSR Pyramid Carolls CSR Pyramid is the most well-known and widely used model of CSR. Carrolls CSR Pyramid, Sourced From Carroll (1996) According to Carroll (1996), a firm has the following four categories of obligations of corporate performance. First and foremost, due to the dimension of philanthropic responsibilities, corporate should contribute to the community and improve the quality of life with the ultimate goal of being a good citizen. Secondly, ethical responsibilities are norms which the society expects the business to be ethical, avoid harm and do what is right. The third is legal responsibilities, the key of which is to obey the law. The fourth is economic responsibilities which mean the primary responsibility of economic entities such as corporations is to satisfy economic needs of the society and generation of surplus for rewarding the investors and further expansion and diversification. (Srivastava, 2012) 3. 2 Purpose of the firm and how that shapes views on CSR There are mainly three competing approaches about the purpose of the modern corporate. Each provides a framework for evaluating policies, corporate governance procedures, as well as the economic and social performance of business. The ? rst, shareholder approach, focus on the ? rm’s purpose of increase its profits while minimizing the importance of its other roles in society. (Quazi and O’Brien 2000) [pic] Fig. 2 Stakeholder Map, Sourced From: http://stakeholderengagementnz. wordpress. com/tag/stakeholder-map/ As can be seen from figure. The second approach theory which is named as stakeholder approach, broadens the  Ã‚  perspective, recognizing the importance of both creating profits and any group or individual who can affect, or is affected by, the achievement of the organizations objectives† (Freeman, 1984) The stakeholder includes shareholders, creditors, employees, customers, suppliers, regulators, and local communities and impact on society at large. The third is social approach, which operated by public consent to â€Å"serve constructively the needs of society† (CED 1971). 3. 3 Arguments for and against CSR 3. 3. 1 Arguments Against Friedman (1970) held that management has one responsibility and that is to maximize the profits of its shareholders. He placed three arguments. The first argument was that Only human beings have a moral responsibility for their actions. He claimed that only human beings can be morally responsible for their actions, corporations are not human beings, therefore cannot be morally responsible for their actions. Since corporations are set up by human beings, it is them who can assume responsibilities for the actions of the corporations. His second argument was that it is the manager’s responsibility to act solely in the interests of shareholders. Here the interests of the shareholders should be profit making. If the manager acts for any other purpose, he is betraying his employer. His third argument was that corporate had no need to deal with social issues since its the job of governments. A second objection to CSR was that it diluted corporates’ primary purpose. The adoption of CSR would put business into efforts unrelated to their proper aim (Hayek 1969). A third argument against CSR was that there was no need to wield social power since business has enough power. It should be noted that the positions present here were applied decades ago, when the idea was narrowly conceived. 3. 3. 2 Arguments For The argument for CSR begin with the belief that it is in business’s long-term self-interest to be socially responsible. (Carroll, 2010) This view holds that, if business is to have a healthy climate in which to function in the future, it must take actions now that will ensure its long-term viability. Carroll and Buchholtz (2009) stated that acting beforehand is more practical and costs less money than simply reacting to social problems. Since pro-acting is better than reacting, adopting CSR initiatives can be beneficial. Another moral argument in favor of CSR is that powerful corporate should be engaged in social issues since their access to significant resources should be used responsibly. (Davis 1973) Besides, brand differentiation was one of the primary reasons companies embraced CSR from the past which means CSR activities enhance corporate reputation (Aswathappa, 2008) Two additional arguments in favor of CSR include that CSR initiatives help corporates to draw employee attraction. Finally, it has been argued that corporate have a duty to take the publics interests and goals into account based on the theory of stakeholders approach which may avoid boycotts and satisfy customers. (Aswathappa, 2008) 3. 3. 3 Summary of the key debates These arguments for and against CSR leave the legitimate perspective that there are, indeed, two sides of the arguments to CSR. However, nowadays, the public believes that, corporate should take the responsibilities of the employees, communities and other stakeholders, in addition to pursuing profits. (Bernstein, 2000) 4 Methodology The analysis was based on exhaustive literature survey regarding the topic and related concepts as well as a case study for CSR issues at Apple Inc. In this paper, secondary sources were gathered to make the research more objective. â€Å"Secondary research is so called because the data come to research ‘second-hand’ (other people have compiled the data). † (Jobber, 2007) Both quantitative and qualitative data were collected from various sources including academic journals, newspapers, periodicals, websites, industry reports and were well used for the purpose of study. A list of all the references is put at the end of the manuscript. Apples profile Apple Inc. (Apple) is a MNC deals with consumer electronics and software. It was founded on 1st April, 1976 by Steve Job and Steve Wozniak in California. By the year of 2011, Apple became the biggest MNC on both revenue and profit. At present, Apple owns more than 300 retail stores over 13 countries and an on-line store. 5. 2 Reasons to engage in CSR To protect the environment, health and safety of employees, customers, and the global communities while bringing the best personal digital experience through innovative products and services is the mission statement of the corporate. Thus, the reason why Apple adopts CSR is not simply for the pursuit for profits or reputation, but also for the protection of human rights and global communities, a part of which is to be engaged in the global issues including environmental protection, energy reduction as would be introduced below. 5. 3 CSR policies at Apple Inc. Apples CSR policies can be summarized from three main resources including the company code of conduct, the Apple supplier responsibility progress report and Apples on-line reports in respect with CSR. Apple’s company code of conduct, which deals with corporate governance, information disclosure, environmental health and safety, and procurement can be driven from Form 10-K, the annual report required by the U. S. Securities and Exchange Commission. The Apple supplier responsibility (SRP) progress report include audit results of labor and human rights, worker health and safety, environmental impact, ethics, management systems. Apple insists that â€Å"suppliers provide safe working conditions, treat workers with dignity and respect, and use environmentally responsible manufacturing processes. The CSR website for Apple includes Apples actions and progress about CSR issues which include respects of energy reduction and the design of environmentally safe products (Apple CSR website) The details of the above CSR practices would be outlined in part 5. 6. 5. 4 Type of CSR approach taken by Apple Inc. From the mission statement above, it is not hard to judge that Apple takes the stakeholder approach, since it took not only the demand of the shareholders but also the demands of employees, customers, and the global communities. In this part, a summary would be put on how it keeps the promises. Firstly, Apple satisfies the demand of shareholders by increasing share price and profits. In 1997, Apple’s share price was $3. 30 while in 2013 its share price had risen to $417. 20. (Morningstar, 2013) For the past four years, Apple has earned first place among Fortune magazine’s World’s Most Admired Companies. As can be seen from figure 3, the revenue and share earning has been continuously growing in the last five years, which proves that the profits of Apples shareholders are promised. Secondly, Apple meet the customers needs with high quality products with a fair price while satisfying the employees with stable jobs and fair salary. Evidences show that by the year of 2012, 62000 jobs have been offered worldwide by Apple with higher than minimum wages of their countries and 60 working hours per week. Last but not least, Apple also takes its CSR of communities which includes the engagement with environmental issues. The highest standards of social responsibility across worldwide supply chain Apple adopted as well as its concern with the environmentally sound products commit its engagement in the environmental issues. (Apple SRP report, 2012) 5. 5 Key dilemmas within CSR challenges 5. 5. 1. Labor and human rights In May 2010, it was reported that several suicide cases occurred at one of Apple’s suppliers, Foxconn. And 13 workers had committed suicide from 2009 to 2010. (M. Moore, 2010) To the result of the investigation, the reason for the multiple suicides was related to the overrate working times. The weekly working hours of workers in Foxconn were up to 70 hours, ten hours above the maximum hours set by Apple’s Supplier Responsibility Report, 2010. In February 2011, another issue about the child labor occurred in Apples suppliers. (M. Moore, 2011) According to Apple’s SRP Report 2011, there were up to 91 underage workers at the suppliers. To deal up with these problems, Apple has signed the Supplier Code of Conduct with the suppliers about the working hours and workers human rights. However, since Apple makes sure that suppliers comply with the Supplier Code by conducting audits. (Apple SRP report, 2012) Theres possibility that similar issues still exit due to the quality of the audit. On the other hand, Apple set up a training program to prevent the hiring of child workers in addition to the regulations set by the code of conduct. However, since the child labour can easily be hidden by providing fake work schedule data, its difficult to solve the problem. What make things worse is the fact that many children in poor families are willing to do the work to make up for the living expense. 5. 5. 2. Workers’ health and safety Concerning workers’ health and safety conditions at the suppliers, in May 2010, The Guardian reported that workers from Wintek had been poisoned by n-hexane, a toxic chemical used to clean the touch screens of iPhones. The employees complained that the compensation Wintek offered for the health damage was not sufficient. However, the workers who did receive compensation were asked to resign from their jobs. Apple addressed the issue of the use ofn-hexane. Apple obliged Wintek to stop using n-hexane and required Wintek to repair its ventilation system and to work with a consultant to improve its environmental health and safety systems. (Apple SRP report 2011) However, one cannot deny that other issues of using poisonous chemicals may happen in the future since it is easy to be hidden in the process of manufacture. 5. 6 CSR tactics at Apple Inc. Apple has taken steps to become a greener company, such as reducing its environmental impact at its facilities. Sourced from Apple CSR Website: http://www. apple. com/environment One of the tactics Apple applied to reduce its impact on environment is to reduce energy use. Apples reduced energy use is due to the product design and the use of renewable energy. Apple designs the products as energy efficient as possible. In addition, Apple aims to power every facility at Apple entirely with energy from renewable sources including solar, wind, hydro, even if the fact that the investment is expensive. Since 2008, Apple has reduced the average power consumed by Apple products by 40 per cent. Another tactic Apple adopted for reducing environmental impact is the greenhouse gas emissions strategy. [pic] Fig. 5 Sourced from Apple Website: http://www. apple. com/environment Apple embraces the action for reducing greenhouse gas lease in the progresses of manufacturing, transportation, product use, facilities and recycling In effort to reduce its overall environmental impact, Apple also offers incentives such as transiting subsidies for employees who use public transportation in Mexico. In addition, Apple’s free buses powered by bio-diesel are severed between the Apple headquarters and the train station. These incentives reduce fuel costs for employees while contributing the environmental protection. Apart from the tactics on environmental issues, Apple is also running an ethical business by satisfying customers with high quality products, insisting highest standards of social responsibility, setting up codes to protect workers human rights, as has been analyzed in part 5. 3 and 5. 4. As the first technology company admitted to the Fair Labor Association, Apple is setting a new standard in transparency and oversight. (FLA, 2012) 6 Conclusion Bearing in mind the premise of CSR which is to treat the stakeholders in a manner deemed ethically acceptable in society (Dolida, 2011), it is inadequate for corporate to solely incorporate CSR for the purpose of increasing shareholders value. Furthermore, Wilson (2003) argues, in CSR debate, what is usually in question is not whether corporate managers have an obligation to consider the needs of society, but the extent to which they should consider these needs. Although Apple has made efforts for CSR practices, theres still something needs to be improved. From the analysis above, its not hard to see that Apple has contributed nothing to the poverty and inequity issues even if it has enough power to do so. Thus, its expected that Apple would be engaged in a wider range of global issues. As a conclusion, in this paper CSR is understood as corporates’ obligation to meet the interests of its stakeholders as well as to consider both social and environmental consequences of its business activities within the global economy. Accessed on 24 February 2012 Apple Supplier Responsibility Progress Report (2012) : www. apple. com/supplierresponsibility, accessed on 24 February 2012 Bernstein, A. 2000. Too much corporate power. Business Week, 11 September Bowen Howard. 1953. Social Responsibilities of the Businessman. New York: Harper and Row, Inc. Carroll B. Archie and Shabana M. Kareem. 2010. The Business Case for Corporate Social Responsibility. Academy of Management Journal, June, p. 312–322 Davis, K. 1960. Can business afford to ignore social responsibilities? California Management Review, 2, p. 70–76. Epstein-Reeves James. Six Reasons Companies Should Embrace CSR: http://www. forbes. com/sites/csr/2012/02/21/six-reasons-companies-should-embrace-csr/, accessed on 2 February 2012 European Commission. 2011-14. Communication from the Commission to the European Economic and Social Committee and the Committee of the regions: A renewed EU strategy for Corporate Social Responsibility, COM (2011) 681 final, p. 6. Fair Labor Association, 13 January 2012: