1 - MARCELO DANIEL ARAUJO ERMEL UNIVERSIDADE DE SÃO PAULO (USP) - FEA
2 - Roy Martelanc Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo - FEA - Administração
3 - Lucas Ayres Barreira de Campos Barros -
Reumo
Firms hold cash for precautionary reasons, in addition, financial frictions force firms to hold cash in order to prevent underinvestiment in states of nature where the cost of external financing rise or, when its cash inflows fall. In that sense, an increase (decrease) in the wedge between external financing costs and internal financing costs will cause firms to increase (decrease) its cash holdings, to prevent firm from forgoing positive investment opportunities
One source of increase in external financing costs is weak protection of creditors \citep{la1999corporate}. In February 2005, Brazil passed a new bankruptcy law in an attempt to increase creditor protection and decrease external financing costs , the law limited the amount to be paid as labor debt to 150 minimum wages, this change is important because before the law, management and directors were used to sue the company in order to get all the value from the asset sale, and in doing so, leaved nothing for creditors.
I use both the Brazilian Bankruptcy Law Reform and the Fiduciary Law as a quasi-natural experiment that exogenously changed the value of firms' tangible assets because of the creditors' rights enforcement. Thus, the objective of this paper is to investigate the effect of a rise in collateral value on firms' cash holdings and on cash flow sensitivity of cash.
Using a DiD identification strategy, building upon POnticeli and Alencar (2016) results - that the new bankruptcy law had different effects for firms according to its tangibility - we defined firms' with higher tangibility as treated and firms' with lower tangibility as controls (as I consider the treatment (control) firms on the top (bottom) 3 deciles of tangibility distribution at the end of 2003).
This setting shows that in the face of a rise in collateral value, more tangible firms reduce its cash holdings on almost 34\%, which accounts for 30.4 million Brazilian Reais for the representative firm, even after controlling for all the determinants of cash holdings exposed by Gao et al. (2013) and potential macroeconomics shocks for specific industries as Gormley and Matsa (2012) appoints and Gao et al. (2013) employs. Additionally, regarding cash flow sensitivity of cash, more tangible add almost 2.2 p.p less to cash holdings after the law compared to less tangible firm
To the best of our knowledge this is the first paper to investigate the impact of an exogenous increase in collateral value on firms' cash holdings and cash flow sensitivity of cash.