Potential dividends and actual cash flows. A regional latin american analysis

Based on a theoretically correct model we examine the value the market assigns to different components of the cash flow to equity including potential" dividends. We study publicly traded firms from five Latin American countries: Argentina, Brazil, Chile, Mexico and Peru during the period 1991-2007. The model includes the following variables: market value of equity, dividends paid, change in equity investment and change in cash and cash equivalent holdings ("potential" dividends). These variables are regressed with actual equity value as dependent variable and the other variables as independent variables (including equity value for next period). We tested the data applying Ordinary Least Squares OLS, and Data Panel. Both tests give consistent results. The contribution of this work is double: First, against current findings, we find that the market assigns less than one dollar to a future dollar for any of the variables studied as expected when we interpret the coefficient of the variables as discount factors. Second, in particular, we found that "potential" dividends (change in liquid assets) destroy value. This means that the value today of a dollar in t+1 is negative. This conclusion confirms theproblem of agency costs of keeping undistributed cash flows and that they should not be included in the cash flows while listed in the Balance Sheet. The solution to the problem of destroying value is not inflating the cash flows, but making decisions to effectively distribute the excess cash."