The optimal current asset holdings are higher under a flexible policy than under a restrictive policy.

Question

Quizplus · Accepted Answer

A flexible policy involves maintaining higher levels of current assets relative to liabilities, which provides greater liquidity and reduces the risk of financial distress, but may lower profitability. A restrictive policy, on the other hand, minimizes holdings of current assets to increase profitability but comes with higher liquidity risk.

The Optimal Current Asset Holdings Are Higher Under a Flexible