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Are Brazilian Firms Savings Sensitive to Cash Windfalls?

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Author Info

  • 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.

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Bibliographic Info

Article provided by Fucape Business School in its journal Brazilian Business Review.

Volume (Year): 5 (2008)
Issue (Month): 2 (May)
Pages: 136-142

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Handle: RePEc:bbz:fcpbbr:v:5:y:2008:i:2:p:136-142

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Keywords: cash flow sensitivity of cash; financial constraints; cash policy.;

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References

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  1. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Maria Cristina Trindade Terra, 2003. "Credit Constraints in Brazilian Firms: Evidence from Panel Data," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 57(2), pages 443-464, April.
  7. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  8. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  9. 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(03), pages 335-359, September.
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Cited by:
  1. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2006. "Corporate Financial and Investment Policies when Future Financing is not Frictionless," NBER Working Papers 12773, National Bureau of Economic Research, Inc.
  2. 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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