Why do Latin American firms hold so much more cash than they used to?

PÉREZ ARTICA, RODRIGO; BRUFMAN, LEANDRO; SAGUÍ, NICOLÁS

Revista Contabilidade & Finanças

Faculdade de Economia, Administração e Contabilidade

Lugar: Sao Paulo; Año: 2018

1808-057X

Results and contributions of the article: We document an increasing trend for corporate cash holdings in a sample of selected Latin American firms between 2000 and 2014. Along the same lines, net leverage and short term debt show a declining trend over the same period. We find that the trade-off theory may account for this. We also find a substantial effect of macroeconomic variables particularly affecting firms operating in the region, such as exchange rate risks.Purpose of the work: We intend to assess whether the trade-off or the pecking ordertheories explain the increase in cash ratios for Latin American firms. Additionally, we seek to test the explanatory power of additional variables capturing key macroeconomic features of Latin American economies.Relevance of the chosen theme: Because of its noticeable increase, cash became a keyfeature of Latin American firm performance in the last decades. The need for a better understanding is stressed by the fact that during most of the last decade, these experienced a phase of accelerated economic growth and buoyant financial markets. The resulting surge in real investment opportunities along that period makes the growing cash holdings all the more puzzling.Impact on the area: As far as we are concerned, no other study addresses this issue in a direct manner. We document strong facts regarding the increase of cash holdings for Latin American firms. We assess traditional explanations and decide which fits more properly to our sample. We build and evaluate empirically a complimentary explanation connected to ER exposure and key macroeconomic variables.Methodology: To address potential sources of endogeneity, we use dynamic panel datamethods. In particular, we apply the system Generalized Method of Moments proposed by Blundell and Bond (1998).