Resumo

Cash holdings constitute a considerable portion of firm’s total assets and have important implications on shareholder value and in several strategic decisions. The literature on cash management has recently attracted much attention from both academic and press. The initiative of the Brazilian Stock Market, that permitted its listed companies to voluntarily commit to the premium listing, provides a unique opportunity to analyze the effects of adopting higher corporate governance on the market value of cash and how it varies in comparison to those firms that did not migrate.

In spite of the major changes in the Brazilian economy and in its stock market, especially after the creation of three high-governance listings (New Market, Level I and Level II) of voluntary adoption, little is known about “How much worth a dollar of cash on balance sheet?” “Is this value different in firms listed in the premium listing in comparison to those listed in the traditional non-premium list?” Our objective is to understand the market value of cash in Brazil and to analyze if this value is differently in firms from the premium listing than the others that did not migrate.

Agency theory predicts that managers have strong incentive to hold more cash to gain discretionary power over, which can destroy shareholders value. In the presence of weak corporate governance, entrenched managers are able to use part of cash to pursue their own private objectives. If shareholders believe that firms that voluntarily adhere to the premium listing in Brazil are subject to stricter governance standards than the regular listing and that these mechanisms reduce the agency costs of free cash flow, then we hypothesize that a dollar of cash may be worth more for them.

Our sample consist of an unbalanced panel comprising 197 Brazilian public firms (2,293 firm-year observations) with annual data available from 2000 to 2018. We obtain our financial data from the Economática© database. All variables were translated into U.S. dollars using historical exchange rates. To test our hypothesis we adapted the model used by Pinkowitz, Stulz and Williamson (2006). The option to adapt the model occurred due to data limitation about R&D expenditure. In this sense, we use the yearly growth rate of a firm’s sales as a proxy for investment opportunities.

We verified for the full sample of Brazilian firms that $1.00 of cash is valued at only $0.291 cents. Our results also indicate that cash contributes more to firm value in firms that voluntarily adhere to the special listing in comparison to those that did not migrate to the exchange's higher standards. A one-dollar increase in cash reserves is associated with an increase in firm value of $0.427 in firms with stronger corporate governance. When we divide our sample according to each level (New Market, Level I and Level II), we see that cash is more valued in firms from New Market ($0.547).

Our analysis reveals that the market value of an extra dollar of cash in Brazil is, on average, less than one dollar ($0.291). Furthermore, we find results consistent with our hypothesis that investors discount the market value of cash in firms that did not migrate to the premium listing. Finally, the results also show that investors assign a higher value to a company’s cash for firms listed on New Market ($0.547). Therefore, we find evidence that the value of a dollar of cash is higher in well-governed firms, indicating a more severe agency problem in firms that did not migrate.

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