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Are Brazilian Firms Savings Sensitive to Cash Windfalls?

Author

Listed:
  • Cristiano M. Costa

    (Economics Department, University of Pennsylvania)

  • Lourenço Senne Paz

    (Economics Department, University of Pennsylvania)

  • Bruno Funchal

    (FUCAPE Business School)

Abstract

Following Almeida, Campello and Weisbach (2003), we use the link between financial constraints and firm’s demand for liquidity to test the effect of financial constraints on firm policies in Brazil. The effect of financial constraints can be captured by a firm’s propensity to save cash out in addition of cash inflows. While constrained firms should have a positive cash flow sensitivity of cash, unconstrained firms’ cash savings should not be systematically related to cash flows. Using 2SLS method to deal with endogeneity problems, we estimate the cash flow sensitivity of cash using a large sample of Brazilian manufacturing firms over the 1995-2007 period and, using the access to international financial markets trough ADRs as a criterion for financial constraint, we find that firms that are more likely to be financially constrained display a significantly positive cash flow sensitivity of cash, while unconstrained firms do not.

Suggested Citation

  • Cristiano M. Costa & Lourenço Senne Paz & Bruno Funchal, 2008. "Are Brazilian Firms Savings Sensitive to Cash Windfalls?," Brazilian Business Review, Fucape Business School, vol. 5(2), pages 136-142, May.
    • Handle: RePEc:bbz:fcpbbr:v:5:y:2008:i:2:p:136-142
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    References listed on IDEAS

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    1. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
    2. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    3. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    4. Terra, Maria Cristina Trindade, 2003. "Credit Constraints in Brazilian Firms: Evidence from Panel Data," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 57(2), April.
    5. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, April.
    6. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    7. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    8. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    9. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    10. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 335-359, September.
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    Cited by:

    1. Araújo, Bruno César & Paz, Lourenço S., 2014. "The effects of exporting on wages: An evaluation using the 1999 Brazilian exchange rate devaluation," Journal of Development Economics, Elsevier, vol. 111(C), pages 1-16.
    2. Kirch, Guilherme & Procianoy, Jairo Laser & Terra, Paulo Renato Soares, 2014. "Restrições Financeiras e a Decisão de Investimento das Firmas Brasileiras," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 68(1), April.
    3. Portal, Márcio Telles & Laureano, Luis, 2017. "Does Brazilian allowance for corporate equity reduce the debt bias? Evidences of rebound effect and ownership-induced ACE clientele," Research in International Business and Finance, Elsevier, vol. 42(C), pages 480-495.
    4. repec:fgv:epgrbe:v:68:n:1:a:5 is not listed on IDEAS
    5. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011. "Corporate financial and investment policies when future financing is not frictionless," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 675-693, June.
    6. Marcio Telles Portal & João Zani & Carlos Eduardo Schönerwald da Silva, 2013. "Is cash negative debt under the perspective of hedging in Brazil?," Brazilian Business Review, Fucape Business School, vol. 10(1), pages 1-26, January.

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    More about this item

    Keywords

    cash flow sensitivity of cash; financial constraints; cash policy.;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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