Why do Latin American firms hold so much more cash than they used to?

Rodrigo Pérez Artica,Leandro Brufman,Nicolás Saguí

doi:10.1590/1808-057x201805660

Rodrigo Pérez Artica, Leandro Brufman + Show 1 more

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https://doi.org/10.1590/1808-057x201805660

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Abstract

Abstract This study assesses whether the trade-off or the pecking order theories explain the increased cash ratios in Latin American firms. It also assesses the explanatory power of additional variables that identify key macroeconomic features in Latin American economies. Due to its noticeable increase, cash became a key feature of Latin American firm performance over the last decades. The need for a better understanding is stressed by the fact that, during most of the last decade, these firms experienced a phase of accelerated economic growth and buoyant financial markets. The resulting surge in real investment opportunities within this period makes the growing cash holdings all the more puzzling. As far as we know, no other research addresses this issue in a direct way. There are robust facts about the increased cash holdings in Latin American firms. This article assesses traditional explanations and defines which fits more properly to the study sample. A complementary explanation regarding exchange rate exposure and key macroeconomic variables is constructed and empirically evaluated. To address potential sources of endogeneity, dynamic panel data methods are used. Particularly, the system generalized method of moments (GMM) was applied, as proposed by Blundell and Bond (1998). This article reports an increasing trend for corporate cash holdings in a sample of selected Latin American firms between 2000 and 2014. Likewise, net leverage and short-term debt show a declining trend over the same period. The trade-off theory may explain this. A substantial effect of macroeconomic variables particularly affecting firms that operate in the region is observed, such as exchange rate risks.

Highlights

This article reports an increasing trend for corporate cash holdings in a sample of selected Latin American firms since 2000, which occurred at a steady pace over the decade and spread across various countries, firm-size segments, and industries
The need for a better understanding of such increased corporate cash holdings is stressed by the fact that, during most of the last decade, the region went through a phase of accelerated economic growth and buoyant financial markets, within the upward phase of commodity export prices and the foreign capital inflow cycle
Regarding the impact of macroeconomic factors, as expected, we find that economic growth affected positively the demand for cash, which can involve higher investment opportunities and cash flows derived from higher economic activity

Summary

Introduction

This article reports an increasing trend for corporate cash holdings in a sample of selected Latin American firms since 2000, which occurred at a steady pace over the decade and spread across various countries, firm-size segments, and industries. This trend played a role in a fairly noticeable shift in the region’s corporate balance sheet structure – at least for the large, listed firms. The growing amount of cash held by Latin American firms reflects a similar performance of corporations in developed economies over the last 30 years It reproduces the foreign reserve accumulation by central banks in most developing economies over the past decade. Substantial media and academic attention has been devoted both to growing cash holdings in developed countries (Bates, Kahle, & Stulz, 2009; Pinkowitz & Williamson, 2001; Pinkowitz, Stulz, & Williamson, 2016) and the foreign reserve accumulation by central banks (Mohanty & Turner, 2006), the recent increase in cash holdings by Latin American firms has been mostly overlooked by scholars

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