Capital Structure, Cash Holdings and Firm Value: A Study of Brazilian Listed Firms

Abstract

This study analyzed the relationship between capital structure, cash holdings and firm value for a sample of publicly traded Brazilian firms, using panel data regressions, employing the fixed-effects estimator. Initially, regressions between capital structure (debt to total capital) and cash holdings (cash to assets), as well as between cash holdings and short and long term debt, were estimated. Next, a model between firm value, capital structure and cash holding was employed. The results of this study suggest that debt, both short and long termed, is negatively related to cash holdings, and that the level of cash holdings is also associated to a lower leverage. The study also presented indirect evidence that financially constrained firms hold more cash. With respect to the impact of the capital structure and cash holdings in the firm value, both short and long-term debt had negative marginal effects on the market value of equity, as well as the financial constraint, suggesting a risk-averse behavior of investors with respect to debt. Cash holdings, instead, is valued as positive by investors, but up to an optimum threshold level. Further from that point, the market capitalization is discounted with respect to cash holdings (inverted U-curve), in synergy with static trade-off theory of cash holdings.