Firms may retain large amounts of cash to cover future potential needs that allows a firm to avoid:

Question

Quizplus · Accepted Answer

Retaining large amounts of cash enables firms to avoid transaction costs and financial distress costs that would be incurred in the event of future needs for financing. Transaction costs are the costs associated with buying and selling securities, and financial distress costs arise when a firm's cash flows are not enough to cover its obligations, resulting in bankruptcy or financial restructuring costs. Retaining cash can help a firm avoid both of these costs, which can be significant.

Firms May Retain Large Amounts of Cash to Cover Future