Resumo

A central question in corporate finance is related to how much of its total assets a firm should keep in the form of cash holdings to maximize its value. How a company manages cash holdings is an important concern to managers, researchers, investors, and policymakers. Many CFOs consider decisions about cash levels to be among the most relevant decisions they make in imperfect capital markets. A large body of literature has recently emerged to increase the understanding of the firm, industry, and country-level factors that explain why companies maintain considerable amounts of cash.

Despite the growing efforts to the determinants of cash holdings, studies about the theme focus almost exclusively on the context of public companies. Moreover, while providing relevant insights, the scarce literature on cash holdings by private firms generally focuses on a single developed country, especially in the U.S. setting, which is often dissimilar to the context of emerging economies’ private firms. We fill this gap in the literature by analyzing cash and its determinants in private and public companies in the Latin American setting.

Latin America is characterized as an underdeveloped market, where firms often have less access to external capital. In this setting, greater cash allows companies to avoid underinvestment. However, one cannot ignore that private firms are more constrained in accessing external funds relative to public companies. Hence, the higher level of financial constraints faced by many Latin American private firms may imply that they cannot hold the desired levels of corporate cash holdings. Thus, we hypothesize that Latin American private firms hold significantly less cash than their public counterparts.

Our sample consists of all public and private firms from the six largest Latin American economies (Argentina, Brazil, Chile, Colombia, Mexico, and Peru), for which annual data are available on the Capital IQ database from 2000 to 2019. Our unbalanced panel data comprises 7,222 unique Latin American firms (46,040 firm-year observations), of which 37,619 firm-year observations are of private firms, and 8,421 firm-year observations are of public companies. In the main analyses, we use Ordinary Least Squares (OLS) regressions with country, industry, and year fixed effects.

After controlling for firm-specific characteristics and for country-level variables, we find that Latin American private firms hold significantly fewer cash holdings than their public counterparts. Precisely, we find that private firms hold, on average, 4.92% of cash and cash equivalents relative to total assets, while public companies hold 6.40%. Therefore, even though private firms from Latin America have less access to external funds and would be expected to have a higher precautionary saving motive, we document that they hold significantly less cash relative to public companies.

We find evidence that Latin American private firms hold a lower proportion of their assets in the form of cash and cash equivalents than do their public peers. Hence, in the Latin American setting, where companies often have less access to external capital at fair terms relative to companies from developed economies, we document that private firms maintain significantly fewer cash holdings. Overall, our findings are important, as we demonstrate that the business environment in which they operate significantly influences firms’ cash holdings.

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