The financialization of Latin American Non-financial Corporations. Specificities within general trends?

PÉREZ ARTICA, RODRIGO; RABINOVIC, JOEL

Cambridge

Workshop; How to Conceptualize Financialization in Developing and Emerging Economies; 2018

Cambridge Political Economy Society

The objective of this paper is to estimate the determinants of cash holdings from Latin American NFCs during the last twenty years focusing especially on whether financialisation has or has not been associated to that increase. We measure financialisation as the proportion of interest income, dividends received, net capital gains, foreign exchange results over total revenues. Cash holdings include not only cash but also other short-term investments and liquid assets typically identified to cash by accounting standards.We use quarterly firm-level data from a sample of 3000 listed firms from the six largest Latin American economies: Argentina, Brazil, Chile, Mexico, Peru and Colombia between 1999q1 and 2017q1. We complement this microeconomic data retrieved from Economatica with macroeconomic information from the International Monetary Fund?s (IMF) International Financial Statistics (IFS) and Balance of Payments (BOP) Databases. The main contribution of this article is to show that, on average, financial income is not related to the increase of cash holdings from Latin American firms. Results change when we perform estimations for firms belonging to specific countries. In this case, we find evidence of a positive and statistically significant relation between cash holdings and financial income for Brazilian and big Mexican NFCs.Second, we also contribute to the financialisation literature by extensively integrating the corporate finance main contributions to the study of corporate cash policies, pointing out a number of reasons why firms may differ in their cash policies and modify them over time. This becomes a key issue when it comes to isolating the impact of financial income on cash holdings, by controlling for other theoretically relevant determinants. Additionally, it provides valuable insights to make sense of Latin American firms? overall financial behavior.Third, by discussing the main implications of Latin American countries? subordinated integration into the global financial markets, we provide a broader theoretical framework for firm cash holdings and financialisation in these countries. Firms operating in Latin America face particular challenges arising from this subordinated financial integration, such as difficulties for issuing domestic currency denominated debt, or ¬¬¬¬¬their vulnerability to sudden stops in foreign capital flows. Such issues definitely contribute to modulate firm financial policies in Latin America, and should receive particular attention when trying to understand the relation between cash holdings and financialization. Importantly, the corporate finance literature has also neglected this issue, emphasizing instead other distinctive aspects of emerging markets, like their concentrated ownership, or institutional factors such as investor protection and corporate governance policies (Ayyagari, Demirguc-Kunt, & Maksimovic, 2013).