Cash holdings policies: speed of cash adjustment and the effect of financially constrained and non-constrained firms

Abstract

The study investigated how the fact that companies are financially constrained or financially unconstrained affects the speed of adjustment to the corporate cash target level of companies in Brazil. For this, we use a sample of 344 publicly traded non-financial companies with shares traded on Brasil, Bolsa, Balcão in the period from 2012 to 2020. We apply a partial adjustment model with the application of the Generalized Moments Method (GMM) in order to give greater treatment of endogeneity problems. To test the investigated relationships, we used as criteria for classifying the sample companies as financially constrained companies and as financially unconstrained companies the payment of dividends and the size of the company. For both criteria, our empirical evidence contradicts previous literature by not indicating a significant relationship between financial constraint and cash adjustment speed. We identified, however, that financial unrestriction affects this adjustment speed, specifically when we consider the dividend payment criterion. We found, therefore, that companies that pay high dividends take longer to adjust their cash levels to target cash compared to other companies, which may be related to less concern with cash retention for precautionary reasons in these companies because they have the option to cut dividends as a way to obtain resources when necessary. The study is important for company managers and financiers as it allows a better understanding of the role that financial restriction and unrestriction, in addition to other characteristics of the company, can play in the management of corporate cash.