The market value of cash and the creation of high‐governance listings of voluntary adoption: Evidence from the Brazilian stock exchange

Abstract

Research Question/Issues: In this article, we analyze whether the initiative of a domestic stock exchange that designed three high-governance listings of voluntary adoption, in addition to maintaining its traditional listing, can mitigate managers' ability to expropriate cash. As a result of the reduction in improper cash diversion in firms with higher disclosure and corporate governance standards, we hypothesize that investors place a higher value on cash in the firms that voluntarily migrate to the premium listing.

The effects of financial constraints on the market value of cash in a mandatory dividend context

“…Our analysis also shows that the value of one dollar of cash within a firm in Brazil is approximately $0.535. This finding is consistent with Jensen's (1986) free cash flow theory and with the evidence of Pinkowitz et al (2006) and Manoel et al (2022). It suggests that the market value of cash holdings is worth significantly less than $1.00 for firms located in countries with weaker investor protection than in other countries.…”

“…11 Unfortunately, Pinkowitz et al (2006) do not report an estimate of the market value of cash for their whole sample. 12 In a recent study with Brazilian public companies, Manoel et al (2022) document that a dollar of cash for the mean firm-year in Brazil from 2000 to 2018 has a value of $0.413 to shareholders, which is similar to the average value found in our article. 13 We are grateful to an anonymous referee for suggesting this analysis.…”

“…This result reinforces our initial findings that cash is worth significantly less than $1.00 in Brazil, as investors expect agency costs to be high in the country due to the low level of investor protection. In summary, the results regarding the average market value of cash in Brazil are consistent with the idea that when agency problems are large, and cash holdings are freely accessible to entrenched managers, shareholders identify the potential private benefits embedded in cash reserves and, consequently, penalise their value (Pinkowitz et al, 2006;Frésard & Salva, 2010;Manoel et al, 2022).…”

“…Corporate cash holdings represent a significant portion of all corporate assets. Considering that capital markets do not work as well as we typically assume they do, then companies' decisions regarding their cash holdings are indeed relevant to firm value (Keynes, 1936; Opler et al, 1999; Pinkowitz & Williamson, 2007; Almeida et al, 2014; Manoel et al, 2022). In this regard, the literature on cash management points out that ensuring that organizations have enough cash to carry out their strategic plans, as well as to maintain their daily operations, is one of the most important financial decisions that managers make in a world with imperfect capital markets (Pinkowitz & Williamson, 2007; Denis & Sibilkov, 2010; Drobetz et al, 2010; Almeida et al, 2014; Manoel & Moraes, 2022b).…”

“…The principal argument for adopting mandatory dividend rules in the country, which were implemented in 1976, was to increase the protection of the cash‐flow rights of minority shareholders in a context where they were poorly protected (Martins & Novaes, 2012). Despite increasing the protection of minority shareholders, the inclusion of the mandatory dividend rules in Brazil further reduces the pool of internal funds, which could be used, among other things, to fund value‐increasing investment opportunities (Martins & Novaes, 2012) in a context where Brazilian firms already face limited access to funding sources (Manoel et al, 2022).…”