Capital Structure, Cash Holdings and Firm Value: A Study of Brazilian Listed Firms

40 Pages Posted: 22 Sep 2013

See all articles by João Caldeira

João Caldeira

Universidade Federal do Rio Grande do Sul (UFRGS)

Tiago Loncan

University of Strathclyde, Department of Accounting and Finance, Students

Date Written: September 22, 2013

Abstract

This study analyzed the relationship between capital structure, cash holdings and firm value for a sample of publicly traded Brazilian firms, using panel data regressions, employing the fixed-effects estimator. Initially, regressions between capital structure (debt to total capital) and cash holdings (cash to assets), as well as between cash holdings and short and long term debt, were estimated. Next, a model between firm value, capital structure and cash holding was employed. The results of this study suggest that debt, both short and long termed, is negatively related to cash holdings, and that the level of cash holdings is also associated to a lower leverage. The study also presented indirect evidence that financially constrained firms hold more cash. With respect to the impact of the capital structure and cash holdings in the firm value, both short and long-term debt had negative marginal effects on the market value of equity, as well as the financial constraint, suggesting a risk-averse behavior of investors with respect to debt. Cash holdings, instead, is valued as positive by investors, but up to an optimum threshold level. Further from that point, the market capitalization is discounted with respect to cash holdings (inverted U-curve), in synergy with static trade-off theory of cash holdings.

Keywords: Capital Structure, Cash Holdings, Firm Value

Suggested Citation

Caldeira, João and Loncan, Tiago, Capital Structure, Cash Holdings and Firm Value: A Study of Brazilian Listed Firms (September 22, 2013). Available at SSRN: https://ssrn.com/abstract=2329346 or http://dx.doi.org/10.2139/ssrn.2329346

João Caldeira

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Av. Carlos Gomes 1111
Porto Alegre, Rio Grande do Sul 90480-004
Brazil

Tiago Loncan (Contact Author)

University of Strathclyde, Department of Accounting and Finance, Students ( email )

Glasgow
United Kingdom

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