Cash liquidity and financial constraints in relation to the market performance of Brazilian companies

Ames, Alice Carolina; Nunes, Rodolfo Vieira; Silva, Tarcísio Pedro da

doi:10.1590/1808-057x20211391.en

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Revista Contabilidade & Finanças

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Original Article • Rev. contab. finanç. 33 (90) • 2022 • https://doi.org/10.1590/1808-057x20211391.en copy

Cash liquidity and financial constraints in relation to the market performance of Brazilian companies^* * Paper presented at the 23rd SemeAd, November of 2020.

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This article aimed to verify the influence of cash liquidity and financial constraints on the market performance of Brazilian companies. According to pecking order theory, organizations choose retained earnings over debts or new share issuances, which may be linked to specific costs. However, trade-off theory highlights that taxes mean that financial policy and debt can be relevant to company value. Thus, this study aims to provide new insights on these topics and knowledge for investigating cash liquidity and financial constraints in relation to performance. The cash liquidity of organizations and financial constraints are important phenomena for performance, given that, in this study, there was an increase in performance. The results suggest that organizations choose to underinvest in the setting due to the difficulty of obtaining credit. Thus, there is an evident need for organizations to present liquidity so as not to lose investment opportunities. Despite the financial constraints, the organizations represent, to some extent, a good investment option, as they prefer excess cash to resources for new investments. The population of this study is formed of companies listed on the B3 S.A. -Brasil, Bolsa, Balcão. The analysis period corresponded to the years from 2014 to 2018 and the KZ index is calculated to classify the organizations regarding their level of constraint. Next, multiple linear regression was run, controlling for year and sector fixed effects. There is a need for organizations to present liquidity to attract new investors. However, companies that find themselves financially constrained can also represent a good investment option as they choose excess cash. In the market, there are some resistances regarding financially constrained organizations, but there may be considerable liquidity in them.

Keywords:
cash liquidity; financial constraints; market performance; Brazilian stock market

Panel A - Sample design
Country	Population	Companies
Brazil	495	130
Panel B - Sample by terciles according to the KZ index
Tercile	Companies	Intraquantile interval
First	43	from -196392692.87 to 3.35
Second	43
Third	44
Total sample	130

Variable	Formula or description	Authors
Dependent
Market performance	Market-to-book (MTB)	Kuan et al. (2012Kuan, T. H., Li, C. S., & Liu, C. C. (2012). Corporate governance and cash holdings: A quantile regression approach. International Review of Economics & Finance, 24, 303-314.), Crisóstomo et al. (2014Crisóstomo, V. L., Iturriaga, F. J. L., & González, E. V. (2014). Financial constraints for investment in Brazil. International Journal of Managerial Finance, 10(1), 73-92.)
Explanatory
Financial constraints (FinC)	${K Z}_{j, t} = - (1.0019 * \frac{{C F}_{j, t}}{K_{j, t - 1}}) + (0.2826 * Q_{j, t}) + (3.1391 * \frac{D_{j, t}}{{T C}_{j, t}}) - (39.3678 * \frac{{D i v}_{j, t}}{K_{j, t - 1}}) - (1.3147 * \frac{{C a s h}_{j, t}}{K_{j, t - 1}})$	Carvalho & Kalatzis (2018Carvalho, F. L., & Kalatzis, A. E. G. (2018). Earnings quality, investment decisions, and financial constraint. Revista Brasileira de Gestão de Negócios, 20(4), 573-598. )
Cash liquidity (LIQ)	$\frac{C a s h a n d s h o r t t e r m i n v e s t m e n t s}{T o t a l a s s e t s}$	Mohammadi et al. (2018Mohammadi, M., Kardan, B., & Salehi, M. (2018). The relationship between cash holdings, investment opportunities and financial constraint with audit fees. Asian Journal of Accounting Research, 3(1), 15-27.)
Control
Company size (SIZ)	LN of total assets	Kuan et al. (2012Kuan, T. H., Li, C. S., & Liu, C. C. (2012). Corporate governance and cash holdings: A quantile regression approach. International Review of Economics & Finance, 24, 303-314.)
Leverage (LEV)	$\frac{T o t a l l i a b i l i t i e s}{T o t a l a s s e t s}$	Kuan et al. (2012Kuan, T. H., Li, C. S., & Liu, C. C. (2012). Corporate governance and cash holdings: A quantile regression approach. International Review of Economics & Finance, 24, 303-314.), Morellec et al. (2014Morellec, E., Nikolov, B., & Zucchi, F. (2014). Competition, cash holdings, and financing decisions [Working Paper]. Social Science Research Network.)
Profitability (PROF)	$\frac{\begin{matrix} E a r n i n g s B e f o r e I n t e r e s t a n d \\ T a x e s (E B I T) \end{matrix}}{T o t a l A s s e t s}$	Im et al. (2017Im, H. J., Park, H., & Zhao, G. (2017). Uncertainty and the value of cash holdings. Economics Letters, 155(1), 43-48.)

Variables	Minimum	Maximum	Mean	Median	Standard deviation
Market-to-book	0.0187783	5.205975	0.8954137	0.6246436	0.8091519
Cash liquidity	0.0014741	0.8702986	0.1431867	0.1090276	0.1199114
Company size	16.06135	25.54019	21.27122	21.37020	1.725994
Leverage	0.0065747	1.201139	0.5576086	0.5708610	0.2046878
Profitability	-0.1370455	-0.1370455	0.0771276	0.07020115	0.0798527
Observations: 435

	FinC	MB	LIQ	SIZ	LEV	PROF
Financial constraint (FinC)	1	0.249**	0.009	0.030	-0.105*	0.215**
Market-to-book (MB)	0.129***	1	0.229**	-0.101*	-0.400**	0.501**
Cash liquidity (LIQ)	0.002	0.211***	1	-0.142**	0.102*	0.081
Company size (SIZ)	-0.006	-0.123**	-0.240***	1	0.357**	-0.005
Leverage (LEV)	-0.096**	-0.315***	-0.025	-0.351***	1	0.023
Profitability (PROF)	0.158***	0.346***	-0.029	0.025	0.013	1

Variables	Dependent variable: market performance
Variables	Coefficient	T statistic
Constant	-0.6647237	-1.22
FinC	0.1591552**	1.96
LIQ	1.452546***	3.80
SIZ	0.0625397***	3.22
LEV	-1.136904***	-7.51
PROF	3.208063**	2.56
Sector and year fixed effects	Yes
R²	39.37
Significance of the model	0.0000***
VIF	1.18-1.51
DW	2.043872
N_O	435
N_F	87
N_C	1

Variables	Dependent variable: market performance		Table 5 - Financial constraint and cash liquidity in relation to market performance
Variables	Coefficient	t statistic	Coefficient	t statistic
Constant	-0.3991573	-0.73	-0.6647237	-1.22
FinC	-3.96e-08	-0.32	0.1591552**	1.96
LIQ	1.782984***	5.69	1.452546***	3.80
FinC*LIQ	1.25e-06**	2.16
SIZE	0.0609935***	2.78	0.0625397***	3.22
LEV	-1.169473***	-6.64	-1.136904***	-7.51
PROF	3.281842***	7.85	3.208063***	2.56
Sector and year fixed effects	Yes		Yes
R²	39.69		39.37
Significance of the model	0.0000***		0.0000***
VIF	1.17 - 3.88		1.18 - 1.51
DW	2.030548		2.043872
N_O	435		435
N_F	87		87
N_C	1		1
Join F test
LIQ + FinC*LIQ	16.20***
FinC + FinC*LIQ	3.33**

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
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Cash liquidity and financial constraints in relation to the market performance of Brazilian companies* * Paper presented at the 23rd SemeAd, November of 2020.

ABSTRACT

Cash liquidity and financial constraints in relation to the market performance of Brazilian companies^* * Paper presented at the 23rd SemeAd, November of 2020.