On the edge: The impacts of cash flow at risk on the shareholders’ equity of public companies in Brazil

Abstract

Abstract The objective of this article was to measure the cash flow at risk (CFaR) of non-financial companies in the Brazilian capital market and compare it to shareholders’ equity in order to assess the risk of insolvency. Unlike banks and insurance companies, which have strong capital requirements, the current regulation of non-financial institutions in Brazil does not provide for the calculation or maintenance of a minimum shareholders’ equity. This study fills a gap in the literature by relating CFaR to the shareholders’ equity of entities, providing a measure of insolvency risk. Monitoring insolvency risk (i.e., the possibility of negative shareholders’ equity) is critical for any entity, regardless of its industry, market, or size. The results of the CFaR measurement show that companies in different sectors can be exposed to insufficient resources in the event of operational problems. It is hoped that this will help regulators in different sectors to assess minimum capital requirements. CFaR was measured using Ebit and Ebitda (quarterly and annual). The panel consisted of 186 companies listed on the B³ between 2010 and 2022, totaling 4,897 company-quarters. The companies were divided into eight subgroups based on their characteristics. The results showed that non-financial listed companies in the Brazilian market may be undercapitalized, as 18% of the 169 entities that currently have positive shareholders’ equity would become negative at a 1% risk level. CFaRs were also re-estimated during the pandemic and did not show a clear pattern compared to other periods.

Keywords

• insolvency risk
• capital requirement
• cash flow at risk
• ruin probability