Cash Holdings Policy: a Dynamic Analysis of Brazilian Companies

Abstract

This paper investigates how corporate cash holdings were adjusted over time for Brazilian companies during the crisis of 2008-2009. We adopt a dynamic model of corporate cash holdings to evaluate the main determinants for the speed of adjustment of cash holdings at the optimum level. We find evidence that: a) the adjustment costs of Brazilian companies are high implying a delay in reaching the optimum level of cash; b) the low speed adjustment to the optimum level is due to the limited availability of credit and the high cost of bank debt; c) during crisis, the changes in working capital are positively related to the level of cash holdings providing evidence that companies prefer finance to growth with liquidity; d) companies have looked for long-term financing to secure liquidity rather than investing on fixed assets, implying a negative relationship between investment and cash holding.

Keywords

• cash holdings
• costs of adjustments
• dynamic trade-off
• liquid assets
• working capital