The Determinants of Corporate Cash Holdings in Brazil

I COLOQUIO PREDOCTORAL LATINOAMERICANO Octubre 21 y 22, 2003

Research Plan for PhD Dissertation

The Determinants of Corporate Cash Holdings in Brazil

Senichiro Koshio PhD Candidate Fundação Getúlio Vargas – EAESP, Brazil E-mail: sekoshio@gvmail.br CLADEA - October 2003 I. Introduction How the decisions on the level of cash holdings are taken by firms? Are the cash holdings managed by active or passive management policies? Kim et al. (1998) and Opler et al. (1999) addressed these issues in the USA, and others have conducted similar researches in UK, Netherlands, Belgium, Japan, Germany and many other countries, analyzed individually or collectively. The present research for the PhD dissertation at Fundação Getúlio Vargas – EAESP aims to address the similar issues in Brazil, analyzing the determinants of corporate cash holdings. There are two main views related to the corporate cash holdings: the trade-off view and the financing hierarchy view. The results of preliminary empirical tests indicate that the corporate cash holdings in Brazil are managed more passively than actively, following more the financing hierarchy view than the trade-off view, in contrast to the findings in the USA reported in the previous papers, which support more the trade-off view. Nevertheless, there is evidence that the higher the financial leverage, the higher the cash holdings by the firms, indicating trade-off based decisions when the firms have debts, which can be explained by the cash buffers for the transaction and the precaution motives as well as by the extra cash holdings for the arbitrage transactions. These results are, therefore, indications that the Brazilian firms manage their cash holdings less efficiently than the US firms, in spite of the lower availability of financial resources in Brazil than the USA. The objective of the research is to conduct further investigation on the determinants of corporate cash holdings in Brazil, seeking to discover the reason by which...