Abstract
ABSTRACT The purpose of our research is to verify the impact of mandatory dividends on Brazilian publicly traded companies, focusing on both the value of cash holdings and the impact on corporate investment. Our work aims to reach the research objective making significant improvements over the previous works on the subject. First, we separate firms according to their dividend status. Second, in addition to investment regressions, we use the value of cash approach to test the impact of mandatory dividend on corporate financial decisions. Finally, our manual data collection makes it possible to allocate the dividend distributed to its reference period. Considering our context, where sources of financing are expensive and scarce, evidences obtained by the present research has great relevance. The law aims to protect the minority investor against the expropriation of resources. However, in dealing with all cases equally, legislation ends up harming companies that rely on these resources for their financing, thereby damaging their shareholders. This article brings new evidences, from an innovative approach, on factors affecting the availability of resources and its impact on the value of cash and on corporate investment in Brazil. We analyzed a sample of 1,654 dividend distributions from 2008 to 2015, using investment and firm value regressions. Our results indicate that companies paying just the minimum dividend have higher value attached to an extra unit of cash, corroborating our view that those companies will likely use these resources to fund future profitable investments. We also find that mandatory dividend has a negative impact on investment, but only for companies paying dividends above the minimum, contrary to our expectations. We argue that the marginal value of cash approach is a more effective way to test the impact of regulation on corporate financial decisions and this last evidence may be the result of endogeneity problems in investment regressions.
Highlights
Daniel Francisco Vancin & Guilherme KirchAccording to Vancin and Procianoy (2016), Brazilian reality regarding low availability of long-term resources to finance investment activities is a great incentive for high retention of cash by companies
For companies that pay just the minimum dividend, financial constraints are likely to be binding. For those firms we expect that: (i) cash holdings have a higher value at the eyes of investors; and (ii) investments are negatively affected by the amount of mandatory dividends
Our results indicate that mandatory dividend has a negative impact on corporate investment, but only for firms that pay dividends above the mandatory
Summary
According to Vancin and Procianoy (2016), Brazilian reality regarding low availability of long-term resources to finance investment activities is a great incentive for high retention of cash by companies. For companies that pay just the minimum dividend, financial constraints are likely to be binding For those firms we expect that: (i) cash holdings have a higher value at the eyes of investors (relatively to firms that pay dividends above minimum); and (ii) investments are negatively affected by the amount of mandatory dividends. Using a sample of Brazilian publicly traded firms and hand collected data about the dividends decisions and policies of each firm, we estimate investment and firm value regressions like Fazzari, Hubbard, and Petersen (1988) and Faulkender and Wang (2006), respectively, augment by terms related to the mandatory dividend and the decision to pay just the minimum.
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