Financial Constraints, Corporate Governance and the Value of Cash

Abstract

Due to market frictions, likelihood of using cash and corporate governance, a further R$ 1.00 in the company's cash may be worth more or less than R$ 1.00 for shareholders. In Brazil, there is an environment of lack of long-term external financing, high interest rates, non-dividend taxation and high shareholder concentration. All these characteristics are important for the shareholders to evaluate the use of the marginal cash. Thus, the present study identified no difference between the assessment of the marginal cash value for restricted and non-restricted firms, possibly due to high interest rates and a lack of long-term external financing. Regarding the issue of good use of cash, the increase of R$ 1.00 in the cash holdings of firms with better governance is worth R$ 1.29 for the shareholder, while for firms with worse governance it is only R$ 0.79. Additionally, investors in Brazil does not seem to evaluate persistent excess cash different than non persistent.