Abstract
We examine the value market assigns to components of the cash flow to equity including potential dividends. We study non financial publicly traded firms from five Latin American countries. The model includes four variables: market value of equity, dividends paid, change in equity investment and change in liquid assets (potential dividends) and are regressed with actual equity value as dependent variable. Tests applied give robust results. The main conclusions: Market assigns less than one dollar to a future dollar for any of the variables studied. Potential dividends destroy value. A dollar invested in liquid assets has a negative Net Present Value and it is not zero NPV investments. We confirm the agency costs of keeping undistributed cash flows.
Highlights
We have examined the value that the market assigns to different components of the cash flow to equity including potential dividends
On the other hand, when we analyze the change in liquid assets, we find that it is part of the cash flow generated by the investment in liquid assets; when included in the cash flows, they are discounted to present value
We agree with Vélez-Pareja and Magni (2009), on the “idea that potential dividends that are not distributed should be neglected in firm valuation, because only distributed cash flows add value to shareholders” (p. 125)
Summary
We have examined the value that the market assigns to different components of the cash flow to equity including potential dividends. We are concerned with the value the market assigns to the components of the Cash Flow to Equity, CFE, in particular to the change in liquid assets Common practice assumes it is distributed among shareholders in reality or in the typical financial model used to derive the cash flows, it is not because it is listed in the balance sheet. We have found that, contrary to common knowledge and assumptions, a dollar invested in liquid assets has a negative Net Present Value (NPV) and they are not zero NPV investments These findings confirm the agency costs of the problem when undistributed cash flows are kept. Potential dividends and actual cash flows.A regional Latin American analysis GERENCIALES ing from the working capital the liquid assets and adding the book value of liquid assets under the assumption that they are zero NPV investments.
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