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Cash Holdings and Firm Value during Latin American Financial Crises Susan Elkinawy* Loyola Marymount University Hilton Center for Business One LMU Drive, MS 8385 Los Angeles, CA 90045-2659 Phone: (310) 338-2345 Fax: (310) 338-3000 [email protected] Mark Stater University of Georgia Department of Public Administration and Policy 204 Baldwin Hall Athens, GA 30602 Phone: (706) 542-2873 Fax: (706) 583-0610 [email protected] June 2007 Abstract We investigate the determinants of cash holdings and firm value of Latin American firms during the Mexican crisis of 1994-1995 and the Brazilian crisis of 1999. We find that each crisis alters the determinants of cash and firm value differently. Larger firms increase their cash holdings during the Mexican crisis, while cross-listed firms increase their holdings of cash during the Brazilian crisis. In addition, during the Brazilian crisis we find an increase in ownership concentration is more value-enhancing for high-cash firms. Our findings suggest that while illiquidity may become more severe during crises, agency costs are also an important factor. JEL classification: G30; G32 Keywords: Cash holdings; Firm Value; Corporate Governance; Financial crises; Emerging markets * Corresponding author. Cash Holdings and Firm Value during Latin American Financial Crises June 2007 Abstract We investigate the determinants of cash holdings and firm value of Latin American firms during the Mexican crisis of 1994-1995 and the Brazilian crisis of 1999. We find that each crisis alters the determinants of cash and firm value differently. Larger firms increase their cash holdings during the Mexican crisis, while cross-listed firms increase their holdings of cash during the Brazilian crisis. In addition, during the Brazilian crisis we find an increase in ownership concentration is more value-enhancing for high-cash firms. Our findings suggest that while illiquidity may become more severe during crises, agency costs are also an important factor. 1 1. Introduction Corporate cash holdings can be characterized as both good and bad for shareholders. On the upside, firms with high cash holdings have superior growth and investment opportunities as well as better operating performance indicators than low-cash firms (Opler, et al., 1999; Mikkelson and Partch, 2003). However, it is also the case that governance arrangements that foster the accumulation of cash are less conducive to the maximization of shareholder wealth. High cash holdings coincide with indicators of poor corporate governance, such as weak country-level shareholder protection laws, larger boards of directors, insider dominance of boards, and a high concentration of insider ownership (Dittmar, Mahrt-Smith and Servaes, 2003; Ferreira and Vilela, 2004; Ozkan and Ozkan, 2004; Kusnadi, 2005; Chang and Noorbakhsh, 2006). Thus, the downside of cash holdings is that they can signify the presence of significant agency problems. Not surprisingly, research has found a negative effect of cash holdings on firm value that is most pronounced when shareholder protection is weak (Kalcheva and Lins, 2006; Pinkowitz, Stulz, and Williamson, 2006). Managers have stronger preferences for cash holdings than shareholders due to the relative ease with which managers can spend cash on items that improve their own utility but do not necessarily raise the value of the firm (Jensen, 1986). Cash is more liquid and more difficult to monitor than the firm’s other financial and non-financial assets. Moreover, the temptation to dissipate cash on pet projects may be especially strong during financial crises in emerging markets because increased market uncertainty can provide a screen for value-reducing self-interested behavior on the part of managers. 2 On the other hand, cash holdings may be beneficial to firms in surviving a severe market downturn as reduced liquidity may increase the difficulty in securing alternate financing. Our study examines the determinants of corporate cash holdings and firm value in a decade when multiple crises hit Latin America and many countries in the region underwent extensive liberalization reforms. Using panel data on publicly-traded nonfinancial firms in Argentina, Brazil, and Mexico from 1990 to 1999, we consider periods of time encompassing the Mexican crisis of 1994-1995 and the Brazilian crisis of 1999. The findings indicate that profitability, firm size, leverage, and measures of governance all affect cash holdings and firm value during crisis and/or pre-crisis periods. While our results suggests that liquidity constraints are more severe during crises, there is also evidence that rising agency costs play a role in asset allocation decisions during financial crises. In both crises firms that should have greater access to alternate sources of financing increase their cash holdings. In addition, we find that the relationship between cash and Tobin’s Q differs based on the degree of ownership concentration. A relatively small body of work has thus far examined how cash holdings respond to crisis conditions. Arslan, Florackis, and Ozkan (2006) consider the effects of financing constraints on Turkish firms during the Turkish financial crisis of 2001-2002 and find that more financially-constrained firms exhibit greater investment-cash flow sensitivity during the crisis than less constrained firms, suggesting liquidity is an important consideration during market downturns. Our study complements these findings by examining the effect of liquidity during crises in a different developing region. We also include a measure of ownership concentration to potentially shed light on governance issues. By examining multiple markets over multiple crises, our findings 3 illuminate how governance and liquidity constraints are manifested across different countries and time periods. We find for example that high-cash firms in Brazil experience higher Tobin’s Q values in both the Mexican and Brazilian crisis. In contrast, high-cash Mexican firms experience lower values of Tobin’s Q during the Brazilian crisis. Thus, our results suggest that financial crises differ in the way that they alter managerial behavior and in the manner that the market values the firm. Moreover, these differences are apparent not only across crises but also among individual countries. The remainder of this paper is organized as follows. Section 2 discusses our hypotheses concerning the effects of firm characteristics on cash holdings and firm value during crisis and non-crisis periods, while Section 3 describes our data and reports the descriptive statistics. Section 4 outlines our empirical methodology for predicting cash and firm value, and Section 5 presents the results. Section 6 concludes. 2. Hypotheses 2.1 Hypotheses for Cash Holdings The effects of firm characteristics on cash holdings are well-documented in the finance literature. Firms where management is more accountable to shareholders (either due to firm structure or country laws) have lower agency costs and tend to hold less cash than firms with weaker governance (Dittmar, Mahrt-Smith, and Servaes, 2003; Chang and Noorbakhsh, 2006). Opler, et al. (1999) identify features of firms that can foster agency conflicts and produce high cash holdings as a result. These include dispersed ownership, large firm size (since size is a deterrent to takeovers), and low debt due to less monitoring by capital markets. However, the evidence suggests that financial characteristics associated with low holdings of cash and liquid assets include large firm 4 size, high leverage, the payment of dividends, high credit ratings, low ownership concentration, and low costs of external financing (Kim, Mauer, and Sherman, 1998; Opler, et al., 1999; Colquitt, Sommer, and Godwin, 1999; Pinkowitz and Williamson, 2001; Dittmar, Mahrt-Smith, and Servaes, 2003). In view of the strong consensus in the literature on the determinants of cash holdings, we adopt the aforementioned relationships as the expected effects of firm characteristics on cash holdings during precrisis time periods. A distinguishing feature of our work is the explicit focus on how the determinants of cash holdings differ between crisis and pre-crisis periods. Our motivating observation is that market conditions become increasingly uncertain (i.e., information asymmetries are stronger) during a crisis. To the extent that agency conflicts and liquidity constraints are greater, this should create a tendency for firms to hold more cash during crises. However, to disentangle governance explanations from liquidity explanations we expect that firms that have limited access to alternative sources of financing will hold more cash during crises. Thus, small firms and firms that are only listed on local stock exchanges should increase their holdings of cash relatively more than large, cross-listed firms during crises if liquidity is the main consideration. We also expect that firms with more dispersed ownership should have less need to hold cash than firms with more concentrated ownership during a crisis due to the relatively greater liquidity of widelyheld shares. 2.2 Hypotheses for Firm Value Firm characteristics that signify growth opportunities and good governance are generally rewarded by the market, resulting in value premiums for these firms. Because 5 cash holdings not only signify higher agency costs but also arise from greater investment opportunities (Opler, et al., 1999), the expected overall effect of cash holdings on firm value is uncertain. During financial crises, the effect of cash on firm value is also uncertain due to potentially greater liquidity needs. In general, we expect firm value to decrease during a crisis for a given set of firm characteristics because of increased market uncertainty and poor market performance. These factors should reduce the demand for stocks in the affected region on world markets. Because strong financial health should be highly desirable to investors in the midst of financial turmoil, we expect crisis conditions to produce an increase in the market valuation of firms that demonstrate good operating performance and desirable governance characteristics. Thus, we expect the effects of characteristics such as high profits, sufficient cash substitutes, high dividend payments, and cross listing to have more positive effects on firm value during a crisis than before. The effect of ownership concentration on firm valuation during crises is uncertain, due to the degree of monitoring associated with share ownership. One issue is the composition of the block owners. If block owners are primarily insiders, governance problems could be greater due to the potential for greater expropriation. If, however, the block owners are mostly outsiders they should provide better monitoring during crises. The present data do not include information on whether the block owners are insiders or outsiders. However, since family ownership is common in Latin American firms, there is a reasonable probability that at least some of the block holders are insiders. This suggests that firm values could drop with an increase in ownership concentration. On the other 6 hand, it is also possible that greater ownership dispersion makes monitoring of the firm more difficult during crises due to collective action problems. 3. Data and Descriptive Statistics 3.1 Data Our subsequent empirical analysis tests the hypotheses outlined in the previous section. We obtain our firm financial data from Economatica, a company that specializes in collecting Latin American firm data. This database tracks every publicly listed Latin American company, providing more comprehensive coverage than databases that generally only include large firms. In addition, Economatica maintains financial information on de-listed firms, eliminating the survivorship bias that is a problem with many developed and emerging market databases. We focus on firms in three of the largest Latin American markets: Argentina, Brazil, and Mexico. Information on cash holdings of Chilean firms is unavailable and thus Chilean firms are excluded from our analysis. We eliminate financial firms (NAIC code 52) and follow the literature as much as possible subject to data availability constraints in our choice of financial variables. The variables describing the firms in the sample therefore include cash holdings, Tobin’s Q, total assets, leverage, net working capital, operating profit, a dummy variable indicating whether or not a firm pays dividends in a particular year, and a dummy for the presence of an American Depositary receipt (ADR) indicating whether or not a firm is cross-listed on a U.S. stock exchange. Data on ADRs are obtained from the Bank of New York. All variables are measured annually in U.S. dollars from 1990 through 1999. More detailed descriptions of the variables are given in the Appendix. 7 We define two crisis analysis periods for purposes of testing our hypotheses. The Mexican crisis analysis period is 1990-1995, with 1994 and 1995 designated the crisis years. The Brazilian crisis analysis period is 1996-1999, with 1999 designated the crisis year. Our approach is to compare the effects of firm characteristics on cash holdings and firm value in pre-crisis versus crisis periods. For each crisis analysis period, we include in the sample only those firms that have available data on all regression variables in at least one pre-crisis year and at least one crisis year. Thus, we are only measuring the effects for firms that survived the crisis. Doing this assures that we compare the same set of firms in both pre-crisis and crisis periods, which allows us to capture how managerial behavior is altered by the crises. Our final sample consists of 346 firms and 1,407 firmyear observations for the Mexican crisis and 403 firms and 1,278 firm-year observations for the Brazilian crisis. For a subset of firms in our database (i.e., 253 Brazilian firms and 761 firm-year observations from 1996-1999), we are able to construct an ownership dispersion variable referred to as “free float.” This variable measures the percentage of a firm’s outstanding shares that are not held by blockholders (where blockholders are defined as shareholders holding at least 5% of the firm’s shares). As mentioned earlier, the data do not designate whether the blockholders are insiders or outsiders, so more concentrated ownership (i.e., lower free float) may or may not be an indicator of poor governance. However, because it is generally well-known that there is a high incidence of family ownership among Latin American firms, block holders of firms in this region are likely insiders and consequently have greater incentive to expropriate from minority shareholders. 8 Figures 1 and 2 present the average cash to net asset ratio in each of our sample countries during the Mexican and Brazilian crisis analysis periods, respectively. What is most apparent from comparing the two graphs is the difference in the trend in each period. In the Mexican period, cash holdings show a general upward trend prior to 1994 (the year the crisis began) with the exception of Mexico which experiences a sharp drop in cash holdings in the early 1990s. In the Brazilian period cash holdings are decreasing at a roughly linear rate in all three countries. During the Brazilian crisis, the rate of decrease is largest in Brazil, the crisis country. Figures 3 and 4 repeat the above analyses for Tobin’s Q. Again the graphs display very different trends in the two crises. During the Mexican period Tobin’s Q displays an inverted U-shaped pattern for Mexico and Brazil, but is decreasing monotonically at a slow rate for Argentina. Over the Brazilian period the pattern of Tobin’s Q is much flatter. Tobin’s Q is lowest in 1998, right before the Brazilian crisis. Brazilian firms have the lowest values of Tobin’s Q over the entire 1996-1999 period. The evidence from the cross-country comparisons suggests that the two crises have noticeably different effects on cash and firm value. However, the effects for both variables are more uniform across countries in the Brazilian than in the Mexican crisis. 3.2 Descriptive Statistics Table 1 presents descriptive statistics for the variables used in our empirical tests. For each crisis, we conduct t-tests for differences in means between pre-crisis and duringcrisis periods. The results indicate that Latin American firms hold a significantly higher proportion of their net assets in cash during the Mexican crisis (11.4%) than in the precrisis period (7.5%). In contrast, Latin American firms hold a lower percentage of their 9 net assets as cash during the Brazilian crisis (8.7%) than they do before the crisis (13.8%). Other differences observed are that firms are significantly larger, more highly leveraged, and increase their incidence of cross-listing between the Mexican crisis and pre-crisis period but not during the corresponding Brazilian period. In the Brazilian crisis, fewer firms pay dividends and share ownership becomes more concentrated relative to the pre-crisis period. The point estimates also indicate no significant change in Tobin’s Q during either crisis, perhaps due to the value-enhancing effects of the early 1990s liberalization and trade reforms cumulating over the decade. Though one might be tempted to conclude that the quality of corporate governance is weakened by the Brazilian crisis, it is important to note that the descriptive findings do not control for changes in firm characteristics from pre-crisis to crisis periods that affect cash holdings and firm value. The following empirical analysis applies the appropriate controls. 4. Empirical Methodology 4.1 Cash Holdings Our empirical analysis is similar to that employed elsewhere in the literature, except that we focus on how crises affect the determinants of cash holdings and firm value. For each crisis, we estimate a linear regression model for the natural log of a firm’s cash to net asset ratio1 as a function of firm governance and financial characteristics, a crisis dummy, and a set of interaction terms between firm characteristics and the crisis dummy. Letting the subscripts i and t denote firms and years, respectively, our models are expressed as: 1 The natural log of the cash to net asset ratio is used as the dependent variable instead of the ratio itself in order to assure that the dependent variable has range (-∞,∞) as must be the case for the classical regression assumption of a normally distributed error term to hold. 10 ln C it = αMex _ crisist + x it β + [x it × Mex _ crisis t ]γ + λi + ε it , t ∈ {1990 − 95} [4.1] ln C it = αBraz _ crisis t + x it β + [ x it × Braz _ crisis t ]γ + λi + ε it , t ∈ {1996 − 99} , [4.2] where Cit is the ratio of cash and cash equivalents to non-cash assets for firm i in year t; xit is a vector of firm variables that includes total assets (or size), leverage, net working capital, operating profit, a dummy variable for whether the firm pays dividends in year t, and a dummy for whether the firm is cross-listed as an ADR in year t;2 Mex_crisist is a dummy variable that equals 1 if year t is one of the years of the Mexican crisis (i.e., 1994-1995) and equals 0 if t is one of the years in our sample period preceding the Mexican crisis (i.e., 1990-1993); Braz_crisist is a dummy variable that equals 1 if t is the year of the Brazilian crisis (1999) and equals 0 if t is one of the years in the sample period between the Mexican and Brazilian crises (1996-1998); λi is a firm fixed effect;3,4 and εit is a zero-mean idiosyncratic disturbance term that varies across firms and years and is assumed uncorrelated with xit. Estimation is with fixed effects, which allows for non-zero correlation between λi and xit. As mentioned previously, we only examine firms that survived the crisis in order to compare the same set of firms and associated managerial behavior pre and during-crisis. More complete definitions of the control variables in xit are provided in the Appendix. Equations [4.1] and [4.2] assume that there are no cross-country differences in the intercepts of cash holdings either before or during the crisis. Likewise, they assume the 2 Tobin’s Q is not included in our cash holdings model because of possible endogeneity (i.e, cash holdings may affect value because it is a signal of greater agency costs). 3 The firm fixed effect includes both observed and unobserved firm characteristics that do not vary over time. Thus, in addition to characteristics that are not observed such as the composition of the board, the fixed effect captures variables that are observed but exhibit no time variation, such as the firm’s country of location. For this reason we do not include country dummy variables in equations [4.1] and [4.2]. 4 In some cases, the ADR and dividend dummies are time-invariant for a given firm. However, for some firms, ADR and dividend payment status change over time, which implies that the effects of these variables can be estimated in a fixed effects model. However, their effects are identified solely based off of variation for firms that experience changes in these variables over time. 11 effects of firm characteristics on cash holdings are the same in all three countries both before and during the crisis. These assumptions are necessary for fixed effects estimation, but are quite strong given that access to liquidity can differ among countries even within the same geographic region. Thus, we also estimate each of the equations [4.1] and [4.2] separately for each country, thereby allowing each country to have its own coefficient vector for each crisis.5 4.2 Methodology for Firm Value Our technique for estimating firm value is similar to that for estimating cash holdings. In particular, we estimate a fixed effects model of Tobin’s Q as a function of firm characteristics for each crisis. The regression models are given by: Qit = αMex _ crisis t + w it β + [w it × Mex _ crisis t ]γ + λi + ε it , t ∈ {1990 − 95} [4.3] Qit = αBraz _ crisist + w it β + [w it × Braz _ crisis t ]γ + λi + ε it , t ∈ {1996 − 99} , [4.4] where Qit is Tobin’s Q for firm i in year t and wit is a vector of firm-level controls that includes cash holdings in addition to the same variables that are in the cash regressions. Thus, we assume that cash holdings directly affect firm value (e.g., because investors can collectively react to cash holdings by buying or selling shares and affecting equity prices) but not the reverse (i.e., the decision of how much cash to hold is made independently of the market value of the firm). Although an important counterpoint is that uncontrolled governance variables (e.g., board composition) could form a spurious link between value and cash such that a cash regression would pick up a significant firm value effect (giving the false appearance of a direct impact), our analysis expunges the impact of these 5 Note that the country-specific estimates may have lower statistical power than the estimates of the model that pools firms from all three countries. 12 variables to the extent that they are roughly constant over time. This is because uncontrolled time-invariant items are subsumed into the fixed effect term λi. Based on this logic, our approach is to include cash holdings directly in the value regressions [4.3] – [4.4] but to exclude firm value from the cash regressions [4.1] – [4.2]. As in the cash holdings models, we estimate the determinants of firm value allowing the effects of the firm characteristics to differ between pre-crisis and crisis periods but not across countries. Holding characteristics constant, we assume that firm value is the same across countries in each crisis analysis sub-period. This assumption would be reasonable if these markets were completely integrated, but this state of affairs is unlikely given that the markets are still developing and were only recently liberalized at the time of our data. Thus, we also estimate each equation [4.3] and [4.4] separately for each country. The cost of this approach is reduced degrees of freedom and lower statistical power, but the benefit is that each country is has a unique vector of regression slope coefficients. In addition, to measure the effects of ownership concentration, we estimate versions of [4.2] and [4.4] for Brazil that include free float, since this variable is available exclusively for Brazilian firms from 1996-1999. 5. Results 5.1 Results for Cash Holdings before and during the Mexican crisis In Table 2 we report the results of our cash holdings regression [4.1], both pooled across countries and separately for each country, for the Mexican crisis analysis period of 1990-1995. The first column shows the results for the regression with the three countries combined and the second through fourth columns show the country-specific regressions. 13 The results in the first column indicate that cash holdings significantly decline during the Mexican crisis, holding firm characteristics constant. This result may seem surprising given that one typically associates higher agency costs (such as those expected to occur during a crisis) with higher cash holdings. However, the result is consistent with a dramatic decrease in access to liquidity during a crisis that prevents firms from holding as much cash as they otherwise would in the presence of greater asymmetric information. Furthermore, the phenomenon of firms holding less cash in the crisis is also consistent with the dissipation of cash on managerial “pet projects,” and thus may be a reflection of higher agency costs rather than agency costs that paradoxically decline (Harford, Mansi, and Maxwell, 2005). In the pre-Mexican crisis period, firm size has a significant positive effect on cash holdings. The magnitude of the estimate implies that a 1 percent increase in total assets results in a 0.38 percent increase in the cash to net asset ratio. During the crisis period, the effect of size becomes even larger. Each 1 percent increase in total assets now raises the cash to net asset ratio by 0.53 percent. Although large firms tend to have easier access to alternate sources of financing and thus should have less need to hold cash than smaller firms, note that Kusnadi (2005), Kalcheva and Lins (2006), and Niskanen and Niskanen (2007) also document a positive size effect, which may reflect higher agency costs in large firms. Thus, the results are consistent with relatively greater agency problems during the crisis that foster the accumulation of more cash. The remaining results in the first column indicate that several firm characteristics have significant effects on cash holdings before and during the Mexican crisis. Net working capital is a substitute for cash in the pre-crisis period, but becomes a weaker 14 substitute during the crisis. This may indicate an unwillingness to substitute non-cash for cash assets during a crisis. Operating profit positively affects cash holdings in the precrisis period, and its effect in the crisis period does not undergo a significant change. Firms that pay dividends hold more cash in the pre-crisis period, and this effect is also unchanged during the crisis. In the second through fourth columns of Table 2 we re-estimate equations [4.1] and [4.2] separately for each country to allow for differences in slopes and intercepts across countries. The results suggest that many of the results for the pooled sample are driven by Brazilian firms, which is not surprising since both the number of firms and the number of firm-year observations are considerably higher for Brazil than the other two countries. While the positive effect of firm size on the cash/net-asset ratio during the crisis is evident in all three countries, it is only significant in Brazil. The coefficient estimate on the Mexican crisis dummy is smallest in absolute value for Mexico, so that cash holdings decrease the least in the crisis country. Interestingly, none of the variables has a significant effect on cash holdings in Mexico. 5.2 Results for Cash Holdings before and during the Brazilian crisis Table 3 reports the results of the cash holdings regressions for the Brazilian crisis. One additional variable is free float (a measure of ownership concentration) that is only available for Brazilian firms. In order to make the regressions directly comparable, the sample of Brazilian firms included in the pooled model and in the Brazil-only model includes only firms with non-missing values of free float during at least one pre-crisis and at least one crisis year. 15 Unlike the Mexican crisis, the Brazilian crisis (as measured by the crisis dummy variable) has no significant effect on cash holdings. This suggests the effects of higher agency costs and lower liquidity are roughly equal and offsetting in this crisis. Also unlike the Mexican period, few of the remaining coefficient estimates are significant in the pooled Brazilian crisis model. In particular, firm size and dividends have insignificant effects on cash in both the pre-crisis and during-crisis periods. A possible explanation for the small t-statistics on many of the coefficients is that as Latin American markets became more integrated with world markets during the 1990s due to financial liberalization and free trade agreements, observable firm characteristics became relatively less important components of asset allocation behavior relative to unobserved governance characteristics (which are subsumed into our fixed effect term). Although the effects of most financial characteristics are insignificant in the Brazilian crisis, there are a few non-zero coefficients. Net working capital has a negative effect on cash holdings that is of similar magnitude both before and during the crisis. Cross listed firms hold less cash prior to the crisis but increase their cash holdings during the crisis. Similar to the size effect documented during the Mexican crisis, the finding on cross-listing is consistent with potential governance problems. Lins, Strickland, and Zenner (2005) document that greater access to capital markets is an important benefit to firms from developing markets that list on a U.S. exchange. This suggests that ADRs have greater financing alternatives and should have less need to hold cash than nonADRs. Operating profit has a positive effect in the pre-crisis period that becomes even greater during the crisis. This may be because managers have a greater opportunity to expropriate additional firm wealth during the crisis. However, it could also suggest an 16 increased precautionary motive for holding cash by firms that have sufficient financial resources to do so. Focusing next on the country-specific results, we find that as in the pooled model the Brazilian crisis dummy has an insignificant effect on cash holdings in each of the three countries and that the effect of size is insignificant both before and during the crisis. The results for the full sample mirror those for Brazil in that, among Brazilian firms, net working capital and cross-listing have negative effects on cash in the pre-crisis period while operating profit has a positive effect. Leverage is negatively associated with cash in Argentina and Mexico prior to the crisis, suggesting that debt serves as a substitute for cash. Higher firm profitability is associated with higher cash holdings in Argentina during the Brazilian crisis. This is apparently the source of the full sample result. Among Brazilian firms, free float is insignificant in the pre-crisis period, indicating that ownership concentration has no effect on the cash/net-asset ratio.6 However, the negative coefficient on the free float*crisis interaction term indicates that firms with more dispersed ownership hold less cash during the crisis than firms with more concentrated ownership. The magnitude of the estimate implies that a one percent increase in ownership concentration is predicted to increase the cash to net asset ratio by 0.56 percent ((-0.4730 – 1.0280)*0.375). This result supports the liquidity hypothesis that firms with more dispersed ownership should have less need to hold cash than firms with more concentrated ownership during a crisis. As mentioned earlier, higher cash associated with highly concentrated ownership concentration could also reflect a 6 The Brazilian model was estimated without free float for comparability with the other countries, but the coefficient estimates were virtually identical and so were not reported. 17 governance problem if the block owners are mainly insiders. Our Tobin’s Q models will examine the valuation effects of concentrated ownership. To summarize, the results of the cash models indicate that Latin American firm managers alter their cash holdings differently in the Mexican and Brazilian crises. Cash holdings fall during the Mexican crisis but not during the Brazilian crisis. While leverage and dividends do not have significantly different effects on cash between crisis and noncrisis periods, the effects of other characteristics do differ between the crises. Larger firms increase their holdings of cash more than smaller firms during the Mexican crisis, while cross-listed firms increase their cash holdings more than non-cross-listed firms during the Brazilian crisis. Both of these effects are consistent with potential agency conflicts, since these types of firms should have less need to hold cash. In addition, Brazilian firms with more concentrated ownership increase their holdings of cash during the Brazilian crisis. The next section seeks to develop a more detailed understanding of the cash holdings results by investigating the determinants of firm value. 5.3 Results for Tobin’s Q before and during the Mexican crisis In the previous section we described the effects of financial crises on the determinants of cash holdings. Because many of these effects are consistent with both agency and liquidity explanations for cash holdings, we attempt in this section to further investigate the implications of the findings by estimating Tobin’s Q both before and during these crises. Tobin’s Q is a standard measure of firm value as it measures the market value of the firm relative to the book value of assets.7 In essence, Tobin’s Q can 7 In this paper, we define Tobin’s Q as market value relative to net assets rather than total assets so that we can control for total assets in the regression without the left and right hand sides being perfectly correlated. 18 be interpreted as the ratio of the future value of the firm to its current value. Consequently, it will rise as the market value of the firm increases and fall as the book value of assets increases. In particular, one may witness an increase in Tobin’s Q even if market value is falling in the event that book value is falling even faster. Because of this possibility, we also estimate regression models in which the market value of the firm (unscaled by assets) is the dependent variable and discuss these results in the next section. The Tobin’s Q results for the Mexican crisis period are reported in Table 4. According to the pooled sample results in the first column, the Mexican crisis has no statistically distinguishable effect on Tobin’s Q. Although this may be an indication that crises do not reduce market value, this seems unlikely given the devastating economic effects of crises on developing markets. Hence, a more probable interpretation might be that both market and book value fall by similar percentages during the crisis such that Tobin’s Q remains roughly constant. The market value results we present subsequently indicate that market value decreases during the Mexican crisis, as expected. The positive coefficient on cash holdings indicates firms that hold more cash have higher values of Tobin’s Q in the pre-crisis period. The magnitude of the coefficient implies that in the pre-crisis period, a one percent increase in cash is associated with a 0.26 percent increase in Tobin’s Q. (Note that the cash coefficient divided by the sample average of Tobin’s Q in the pre-crisis period is 0.2299 / 0.869 = 0.26). This positive association between cash and value is consistent with studies that find that firms with more growth opportunities hold more cash. However, as shown later when the unscaled It turns out, however, that the results are essentially the same regardless of whether the denominator is expressed as net or total assets. 19 version of market value is the dependent variable, the effect of cash holdings on market value is negative during the Mexican crisis. The remaining results in the first column suggest that in the pre-crisis period, Tobin’s Q is lower for larger firms and higher for cross-listed firms. The value premium for small firms could be attributed to more growth opportunities as well as higher agency costs of large firms. The premium for cross-listed firms is likely due to greater visibility and more stringent governance controls for ADR listings. Under crisis conditions investors appear to display a favorable view toward dividends but an aversion to highly leveraged firms and those with high working capital. Since working capital is typically a substitute for cash, the negative effect could reflect collection concerns associated with current assets due to potentially more bad debt. Interestingly, the interaction between the crisis dummy and ADR is negative, so that the effect of cross listing becomes less positive during than before the crisis. Elkinawy (2005) finds that U.S.-based Latin American mutual fund managers increased their holdings of ADRs during the Asian crisis, particularly closed-end funds that are less liquidity-constrained relative to openend funds. However, investors do not increase their holdings of cross-listed firms during the Brazilian crisis. Thus, the negative effect we document is consistent with potentially increased selling of ADRs by liquidity-constrained foreign investors who are relatively highly represented among the owners of these securities. The country-specific results in the second through fourth columns of Table 4 illustrate that the Mexican crisis has no significant effect on Tobin’s Q in any of the sample countries. However, cash holdings are positively associated with Tobin’s Q in both Argentina and Brazil prior to the crisis, with the effect in Brazil becoming even 20 more positive during the crisis. The result for Brazil is suggestive of a liquidity premium for firms with high growth opportunities during this crisis. An inspection of the remaining country-specific coefficient estimates reveals that the value premium for small firms increases in Argentina during the Mexican crisis, while the negative effects of leverage and net working capital during the crisis in the full sample are driven by Brazilian firms. Finally, the value premium to dividend-paying firms during the Mexican crisis is observed only for Brazil (but arises in the pooled results as well), while unlike the pooled model, cross-listed Argentinean firms experience higher Tobin’s Q values during the crisis. 5.4 Results for Tobin’s Q before and during the Brazilian crisis The first column of Table 5 shows that unlike the Mexican crisis, Tobin’s Q declines during the Brazilian crisis, but larger firms increase in value relative to the precrisis period. Also unlike the Mexican crisis, firms with high leverage and high net working capital have relatively higher Tobin’s Q values during the Brazilian crisis, while dividends have no effect. The positive effect of leverage may reflect the role of debt as a mechanism for disciplining managerial behavior (Harvey, Lins, and Roper, 2004). However, similar to the Mexican crisis cross-listed firms have lower Tobin’s Q values during the crisis. According to the country-level regression results, the Brazilian crisis significantly reduces Tobin’s Q in Argentina and Mexico but not Brazil. High cash holdings among Brazilian and Mexican firms are associated with higher valuations prior to the crisis, but there are differences in the effect of cash on firm value between the two countries during the crisis. In Brazil, cash has a greater positive effect on Tobin’s Q during the crisis, but 21 in Mexico the effect of cash is negative during the crisis. This might suggest that concerns about managerial expropriation are relatively greater in Mexico while liquidity is of relatively greater concern in Brazil. Brazilian firms that pay dividends have lower Tobin’s Q values during the crisis than before. In all three countries large firms have relatively higher valuations during the Brazilian crisis than before. Column 3 indicates that the effect of the free float variable in Brazil is zero in both the pre-crisis and crisis periods, indicating no market-to-book devaluation of Brazilian firms with more concentrated ownership. It may be that the liberalization reforms during the 1990s loosened the association between block holdings and inside ownership among Brazilian firms. Dittmar and Mahrt-Smith (2007) find that the accumulation of cash is only problematic for poorly-governed firms, since these firms tend to dissipate cash on less profitable investments. Although the present data do not indicate how cash is spent, we attempt to examine the governance issue more closely by testing the cash-value link with respect to ownership concentration. To do this, we create a three-way interaction among cash holdings, free float, and the crisis dummy variable. The coefficient on this interaction term reflects the pre-to during-crisis difference in the effect of cash on firm value for firms with differing levels of ownership concentration. In Column 4, the insignificant coefficient on the cash*free-float interaction suggests that the effect of cash on firm value is independent of ownership concentration prior to the Brazilian crisis. However, the negative coefficient on the cash*free-float*crisis interaction term suggests that during the crisis, cash has a value-reducing effect for firms with more dispersed ownership. Although one might expect that if the block owners are insiders they are 22 more likely to expropriate from minority shareholders, La Porta, et al. (2002) find that higher insider cash flow ownership is associated with higher valuation, particularly in countries with low investor protection. They argue that because expropriation is costly, higher insider cash flow ownership should actually lead to less expropriation. Another possibility is that firms with more concentrated ownership are easier to monitor, a characteristic particularly valuable during a turbulent time period. Finally, firms with more dispersed ownership should have less need to hold cash for liquidity reasons. This suggests that to the extent that these firms do hold cash, the cash is more likely to be used contrary to shareholder interests during a crisis than before. In summary, the firm value models indicate that cross-listed firms have lower Tobin’s Q values in both the Mexican and Brazilian crisis while Brazilian firms with more cash have higher Tobin’s Q values in both crises. However, similar to the cash holdings models, we also observe many differences in the determinants of Tobin’s Q between the Mexican and Brazilian crisis. Tobin’s Q falls during the Brazilian crisis but not during the Mexican crisis. We also find that firms with higher leverage and higher net working capital have lower values during the Mexican crisis, while leverage and net working capital are value-enhancing during the Brazilian crisis. Finally, our analysis of ownership concentration reveals that the degree of block ownership affects the link between cash and firm value, suggesting that governance concerns become more significant during crises. 7. Sensitivity Tests We conduct a number of sensitivity tests to check the robustness of our results to alternative specifications. Table 6 presents the results of regression models that use 23 market value (defined market capitalization plus short term and long term debt) rather than Tobin’s Q as the dependent variable. The reason for doing this is to examine the direct effects of the control variables on a single measure of value rather than on a ratio of value measures. The results for the Mexican crisis in the first column indicate that as expected, market value falls significantly during the crisis. Cash holdings have no effect on market value before the crisis, but have a negative effect during the crisis. This is consistent with the notion that investors penalize firms for accumulating more cash during a crisis, when agency costs are likely to be higher. Although we also observe a drop in firm value during the Brazilian crisis relative to the pre-crisis period, we do not observe a significant effect of cash holdings on market value either before or during the crisis. Thus, the positive effect of cash on Tobin’s Q in Table 5 is consistent with the fact that cash is more valuable for firms with higher growth opportunities rather than simply for firms with higher market values. The third and fourth columns in Table 6 indicate that ownership concentration has no effect on firm value, with or without the interaction with cash. These findings suggest that governance considerations are relatively more important in assessing differences in the determinants of a firm’s growth opportunities rather than in its market value during a crisis. The next sensitivity test involves redefining the Brazilian crisis period as a twoyear rather than a one-year window. The rationale for the one-year window utilized in our baseline regressions is that the crisis officially occurred in January 1999, so that responses to the crisis by local managers based on our year-end data should be most apparent in 1999. However, because it is possible that some of the crisis impacts were either felt or anticipated in 1998, we re-estimate the Brazilian crisis cash holdings and 24 Tobin’s Q regressions with the crisis period lengthened to two years (1998-1999) and report the results in Table 7. The results for cash holdings are very similar to those with the one-year window except that the interaction terms are all insignificant. In particular, the crisis still has no effect on cash holdings and, likewise, size has no effect either before or during the crisis. When free float is added and the analysis is restricted to Brazil, we again observe no crisis effect. Free float also has no effect before the crisis, but it does have a negative effect on cash holdings during the crisis, as was observed when a oneyear crisis window was employed. The results for Tobin’s Q with the two-year window are generally similar as those with the one-year window except that more variables are now significant. In unreported models, we also estimate industry-specific regressions for cash holdings, where industries have been grouped into two very broad categories (“manufacturing” and “service”) so that there are sufficient numbers of observations in each industry category to obtain meaningful regression results. The following industries are classified as “manufacturing” industries: agriculture, mining, utilities, transportation, construction, and manufacturing (i.e., the two-digit NAIC code specifically designated as manufacturing). The following industries are grouped together under the title of “service” industries: wholesale, retail, information, real estate, professional, management, administration, education, health, arts, accommodations, and all “other” industries not previously listed. Financial firms continue to be excluded from our sample. For the Mexican crisis, we find a negative effect of the crisis on cash holdings, a positive effect of size, and a positive size-crisis interaction coefficient in manufacturing but not service industries. The effects of net working capital and dividends also differ 25 between pre-crisis and during crisis periods for manufacturing but not service industries. For the Brazilian crisis, the effects of firm characteristics on cash holdings are similar in the pre-crisis period for manufacturing and service industries, but the during-crisis effects are different in the two industry groupings. Specifically, the coefficient on the crisis dummy is negative and the coefficients on the crisis-leverage interaction and the crisisnet working capital interaction are positive for service but insignificant for manufacturing industries. One lesson that therefore emerges from the industry analysis is that the effects of a crisis differ across industries, but that it is difficult to generalize the reactions of a particular industry across different crises. In other unreported models, we alter the specifications by defining cash holdings as the ratio of cash to total assets instead of net assets. For each crisis, the results are virtually identical regardless of how cash holdings are defined. The one exception is that when the cash to total asset ratio is used, the interaction term between operating profit and the crisis dummy becomes insignificant instead of positive. As another robustness check, we remove assets from the denominator entirely and simply use absolute cash holdings as the dependent variable. Analyzing the pooled sample of firms from all three countries, the results for each crisis are again almost entirely unaffected. Finally, to account for the time series nature of the data, we also estimate cash holdings regressions (with cash to net assets as the dependent variable) with explicit time trends for each crisis. For the Mexican crisis period we specify a cubic time trend because of the shapes of the country averages in Figure 1. Although the time variables are all significant indicating a cubic time trend does exist, the other coefficient estimates are not notably affected. For the Brazilian crisis we use only a quadratic trend because 26 the time plots in Figure 2 are simpler (they appear almost linear) and because the analysis period consists of just four years. The time variables are insignificant and the other coefficient estimates are unaffected. Thus, our results appear robust to time controls. 8. Conclusion Using panel data on non-financial firms in Argentina, Brazil, and Mexico during the 1990s, we investigate whether financial crises in emerging markets alter the determinants of corporate cash holdings and firm value. We find that Latin American firm managers alter their cash holdings differently in the Mexican crisis of 1994-1995 than in the Brazilian crisis of 1999. Our Tobin’s Q regression models indicate that the determinants of firm value also differ across crises. Overall, our findings suggest that the effect of financial crises on firms is not uniform, even for crises originating in the same geographic region. The results we document are consistent with both decreases in liquidity as well as increases in agency conflicts during crises. Because more explicit firm-level governance measures are unavailable in these data, a definitive disentangling of transaction and precautionary motives for holding cash from agency explanations awaits further research. A recent Wall Street Journal article indicates that foreign investors have quadrupled their ownership stake in emerging markets over the past five years, and these investors are becoming more active in the governance of these firms (Slater, 2007). As a result, the role of governance in asset allocation decisions as emerging markets become increasingly integrated with world markets is a high priority for future work. 27 Appendix. Definition of firm characteristics The sample consists of all non-financial publicly traded firms with available data in Argentina, Brazil, and Mexico. The source for firm financial data is Economatica. The ADR program is obtained from the Bank of New York. All variables are measured annually in U.S. dollars as of December 31. Cash Holdings (Cash & ST investments)/(Net assets), where net assets = Total assets – Cash & ST investments Tobin’s Q (Market capitalization + ST debt + LT debt)/(Net assets) Size Total assets Leverage Total liabilities/Total assets Net Working Capital (Current assets – Cash & ST investments – Current liabilities)/(Net assets) Operating Profit (Earnings before interest, taxes, depreciation, & amortization)/(Net assets) Dividend Dummy Dummy variable = 1 if the firm’s dividend yield was greater than zero during the year and 0 otherwise ADR Program Dummy variable = 1 if firm has an American Depositary Receipt in a given year and 0 otherwise Free Float Percentage of firm not owned by blockholders, defined as shareholders who own five percent or more of the shares (only available for Brazilian firms after 1995). 29 References Arslan, O., C. Florackis, and A. Ozkan, 2006, The role of cash holdings in reducing investmentcash flow sensitivity: evidence from a financial crisis period in an emerging market. Emerging Markets Review 7, 320-338. Chang, K. and A. Noorbakhsh, 2006, Corporate cash holdings, foreign direct investment, and corporate governance. Global Finance Journal 16, 302-316. Colquitt, L.L., Sommer, D.W. and N.H. Godwin, 1999, Determinants of cash holdings by property-liability insurers. Journal of Risk and Insurance 66 (3), 401-415. Dittmar, A., and J. Mahrt-Smith, 2007, Corporate governance and the value of cash holdings. Journal of Financial Economics 83, 599-634. Dittmar, A., J. Mahrt-Smith, and H. Servaes, 2003, International corporate governance and corporate cash holdings. Journal of Financial and Quantitative Analysis 38, 111-133. Elkinawy, S., 2005, Mutual fund preferences for Latin American equities surrounding financial crises. Emerging Markets Review 6, 211-237. Ferreira, M.A., and A.S. Vilela, 2004, Why do firms hold cash? Evidence from EMU countries. European Financial Management 10, 295-319. Harford, J., S.A Mansi, and W.F. Maxwell, 2005, Corporate governance and firm cash holdings. Working paper, University of Washington, Virginia Tech, and University of Arizona. Harvey, C.R., K.V. Lins, and A.H. Roper, 2004, The effect of capital structure when expected agency costs are extreme. Journal of Financial Economics 74, 3-30. Jensen, M.C., 1986, Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76, 323-329. Kalcheva, I. and K.V. Lins, 2006, International evidence on cash holdings and expected managerial agency problems. Working paper, University of Utah. Kim, C., D.C. Mauer, and A.E. Sherman, 1998, The determinants of corporate liquidity: theory and evidence. Journal of Financial and Quantitative Analysis 33, 335-359. Kusnadi, Y., 2005, Corporate governance mechanisms and corporate cash holdings. 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Pinkowitz, L., R. Stulz, and R. Williamson, 2006, Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A cross-country analysis. Journal of Finance, forthcoming. Pinkowitz, L. and R. Williamson, 2001, Bank power and cash holdings: Evidence from Japan. Review of Financial Studies 14 (4), 1059-1082. Slater, J., Emerging market investors seek more influence. Wall Street Journal, April 11, 2007, C3. 31 Figure 1: Average Cash Holdings By Country in Mexican Crisis Analysis Period 0.2 Assets Cash as Percentage of Net 0.25 0.15 Brazil Mexico 0.1 Argentina 0.05 0 1990 1991 1992 1993 1994 1995 Year Notes: Cash holdings are defined as the ratio of cash and short term investments to net assets. Net assets are defined as total assets minus cash and short term investments (measured in U.S. dollars). The graphs display average values of cash holdings only among firms with available data for all financial variables used in regressions in at least one pre-crisis and at least one crisis year. The series for Argentina and Mexico begin in 1991 instead of 1990. The number of observations for Argentina is 0, 6, 16, 15, 25, and 37 in the years 1990-95, respectively. The number of observations for Brazil is 163, 164, 177, 179, 217, and 230 in the years 1990-95, respectively. The number of observations for Mexico is 0, 17, 2, 39, 56, and 64 in the years 1990-95, respectively. 0.25 0.2 of Net Assets Cash Holdings as Percentage Figure 2: Average Cash Holdings by Country in Brazilian Crisis Analysis Period Brazil 0.15 Mexico 0.1 Argentina 0.05 0 1996 1997 1998 1999 Year Notes: Cash holdings are defined as the ratio of cash and short term investments to net assets. Net assets are defined as total assets minus cash and short term investments (measured in U.S. dollars). The graphs display average values of cash holdings only among firms with available data for all financial variables used in regressions in at least one of the pre-crisis and one of the during-crisis years. The series for Argentina and Mexico begin in 1991 instead of 1990. The number of observations for Argentina is 34, 34, 33, and 42 in the years 1996-99, respectively. The number of observations for Brazil is 165, 150, 193, and 253 in the years 1996-99, respectively. The number of observations for Mexico is 70, 94, 102, and 108 in the years 1996-99, respectively. 32 Tobin's Q Figure 3: Average Tobin's Q by Country in Mexican Crisis Analysis Period 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Mexico Argentina Brazil 1990 1991 1992 1993 1994 1995 Year Notes: Tobin’s Q is the sum of market capitalization, short-term debt and long-term debt all divided by net assets (measured in U.S. dollars). The graphs display average values of Tobin’s Q only among firms with available data for all financial variables used in regressions in at least one of the pre-crisis and one of the during-crisis years. The series for Argentina and Mexico begin in 1991 instead of 1990. The number of observations for Argentina is 0, 6, 16, 15, 25, and 37 in the years 1990-95, respectively. The number of observations for Brazil is 163, 164, 177, 179, 217, and 230 in the years 1990-95, respectively. The number of observations for Mexico is 0, 17, 2, 39, 56, and 64 in the years 1990-95, respectively. Tobin's Q Figure 4: Average Tobin's Q by Country in Brazilian Crisis Analysis Period 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Mexico Argentina Brazil 1996 1997 1998 1999 Year Notes: Tobin’s Q is the sum of market capitalization, short-term debt and long-term debt all divided by net assets (measured in U.S. dollars). The graphs display average values of Tobin’s Q only among firms with available data for all financial variables used in regressions in at least one of the pre-crisis and one of the during-crisis years. The series for Argentina and Mexico begin in 1991 instead of 1990. The number of observations for Argentina is 34, 34, 33, and 42 in the years 1996-99, respectively. The number of observations for Brazil is 165, 150, 193, and 253 in the years 1996-99, respectively. The number of observations for Mexico is 70, 94, 102, and 108 in the years 1996-99, respectively. 33 Table 1 Descriptive Statistics for Mexican and Brazilian Analysis Periods Sample SubPeriod Variables ANALYSIS PERIOD FOR MEXICAN CRISIS Pre-Crisis Crisis (1990 – 1993) (1994 – 1995) Mean/ Std. Mean/ Std. Median Dev. Median Dev. Cash Holdings 0.075 / 0.031 0.112 0.114 / 0.041 0.464 0.038** 0.026 0.138 / 0.052 0.449 0.087 / 0.035 0.176 -0.051** 0.027 Tobin’s Q 0.778 / 0.383 5.481 0.786 / 0.613 0.768 0.008 0.969 0.869 / 0.680 0.778 0.798 / 0.647 0.610 -0.071 0.107 1108.9 / 191.6 4510.4 1701.6 / 375.4 6805.3 592.6* 0.051 1900.7 / 554.8 6038.7 1437.2 / 371.2 3879.7 -463.5 0.158 0.180 / 0.146 0.157 0.208 / 0.170 0.167 0.028*** 0.002 0.254 / 0.236 0.191 0.268 / 0.238 0.264 -0.014 0.283 -0.019 / -0.008 0.181 -0.040 / -0.019 0.471 -0.021 0.253 -0.024 / -0.011 0.384 -0.031 / -0.018 0.307 -0.007 0.761 0.087 / 0.077 0.127 0.094 / 0.092 0.105 0.007 0.297 0.107 / 0.107 0.143 0.115 / 0.118 0.109 0.007 0.363 Dividend Dummy 0.585 / 1.0 0.493 0.553 / 1.0 0.498 -0.032 0.235 0.584 / 1.0 0.493 0.526 / 1.0 0.500 -0.058* 0.052 ADR Dummy 0.021 / 0.0 0.142 0.135 / 0.0 0.342 0.115*** 0.000 0.241 / 0.0 0.428 0.243 / 0.0 0.430 0.002 0.937 Free Float ---- ---- ---- ---- ---- ---- 0.425 / 0.420 0.222 0.375 / 0.347 0.231 -0.050*** 0.004 Number of Firm-year obs. 778 Size ($MM) Leverage Net Working Capital Operating Profit 629 CRISISPRE CRISIS Diff. in pmeans value ANALYSIS PERIOD FOR BRAZILIAN CRISIS Pre-Crisis Crisis CRISIS(1996 – 1998) (1999) PRE CRISIS Mean/ Std. Mean/ Std. Diff. in pMedian Dev. Median Dev. means value 875 403 Notes: For each crisis, the sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and one crisis year. The Mexican analysis period is from December 1990 to December 1995, where the Mexican crisis spans the years 1994-1995. The Brazilian analysis period is from December 1996 to December 1999, where the Brazilian crisis spans the year 1999. Cash holdings are defined as the ratio of cash and short-term investments to net assets, where net assets are equal to total assets minus cash and short-term investments. Tobin’s Q is defined as the sum of market capitalization, short-term debt, and long term debt all divided by net assets. Size is measured by total assets. Leverage is the ratio of total liabilities to total assets. Net working capital is the difference between non-cash current assets and current liabilities all divided by net assets. EBITDA is earnings before interest, taxes, depreciation, and amortization divided by net assets. Dividend dummy is a dummy variable equal to one if the firm’s dividend yield is greater than zero in a given year and zero otherwise. ADR Dummy is a dummy variable equal to one if the firm has an American Depositary Receipt in a given year and zero otherwise. Free float is the percentage of shares outstanding not owned by blockholders (where a blockholder is defined as someone who owns at least 5% of shares outstanding). Free float is only available for Brazilian firms and only during the Brazilian crisis analysis period. The number of observations on free float is 508 in the pre-Brazilian crisis period and 253 in the Brazilian crisis period. All variables are measured annually in U.S. dollars as of December 31 of the given year. *** (**) (*) – Difference in means is significant at the 1% (5%) (10%) level 34 Table 2 Fixed Effects Models of Cash Holdings before and during the Mexican Crisis, December 1990 – December 1995 Dependent variable: ln(Cash & ST Investments/Net Assets) Pooled Argentina Coeff. p-value Coeff. p-value Size (natural log) 0.3791*** 0.000 -0.5410 0.504 Leverage -0.5832 0.247 1.4994 0.519 Net Working Capital -1.2620*** 0.001 -2.5360 0.253 Operating Profit 1.0945*** 0.013 8.7071* 0.065 Dividend Dummy 0.2623** 0.017 -0.0854 0.896 ADR Dummy 0.2954 0.486 0.5062 0.697 Crisis Dummy -2.8917*** 0.003 -6.4235 0.234 Size*Crisis 0.1516*** 0.003 0.3787 0.184 Leverage*Crisis -0.4472 0.374 -2.0843 0.397 NWC*Crisis 0.8653** 0.025 3.7404 0.109 Operating Profit*Crisis 0.6449 0.331 -4.7104 0.350 Dividend*Crisis -0.2043 0.211 0.1694 0.839 ADR Dummy*Crisis -0.4686 0.235 -0.7263 0.471 Constant -15.7523*** 0.000 0.9573 0.952 Within R2 Overall R2 Number of firms No. of firm-year obs. 0.067 0.013 346 1,407 0.296 0.196 39 99 Brazil Coeff. p-value 0.3683*** 0.001 -0.5081 0.366 -1.3295*** 0.002 0.9203** 0.049 0.2449** 0.044 0.8203 0.547 -2.9997*** 0.007 0.1529*** 0.008 -0.0313 0.957 0.9611** 0.028 0.8740 0.232 -0.1610 0.395 -0.7900 0.566 -15.6265** 0.000 0.070 0.006 241 1,130 Mexico Coeff. p-value 0.3102 0.425 0.5140 0.713 0.3391 0.763 2.4604 0.287 0.3563 0.210 -0.2694 0.437 -1.6544 0.522 0.0969 0.454 -1.1035 0.246 0.7690 0.470 -0.8225 0.713 -0.4809 0.118 0.2108 0.528 -14.0535* 0.077 0.179 0.108 66 178 Notes: The sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and at least one crisis year. The Mexican crisis period is defined as the years 1994-1995. The coefficients on the interaction terms represent the difference in the effect of the variable on cash holdings between the crisis and pre-crisis period. Variable definitions are provided in the Appendix. *** (**) (*) – Coefficient estimate is significant at the 1% (5%) (10%) level. 35 Table 3 Fixed Effects Models of Cash Holdings before and during the Brazilian Crisis, December 1996 – December 1999 Dependent variable: ln(Cash & ST Investments/Net Assets) Pooled Argentina Coeff. p-value Coeff. p-value Size (natural log) 0.1057 0.371 -0.7461 0.134 Leverage -0.5466 0.166 -3.1315* 0.076 Net Working Capital -0.8924*** 0.000 -0.7626 0.569 Operating Profit 1.9658*** 0.000 -0.6901 0.470 Dividend Dummy 0.0572 0.596 0.1331 0.678 ADR Dummy -0.7220*** 0.003 0.7493 0.493 Free Float ------------Crisis Dummy -0.1040 0.904 -1.0869 0.698 Size*Crisis -0.0235 0.604 0.0118 0.938 Leverage*Crisis 0.4292 0.229 0.2395 0.876 NWC*Crisis 0.3795 0.193 -0.0980 0.937 Operating Profit*Crisis 1.1363* 0.077 7.0224** 0.024 Dividend*Crisis -0.1182 0.434 0.0893 0.866 ADR Dummy*Crisis 0.3152** 0.046 0.3523 0.404 Free Float*Crisis ------------Constant -9.7844*** 0.000 7.3722 0.437 Within R2 Overall R2 Number of firms No. of firm-year obs. 0.129 0.024 403 1,278 0.224 0.061 42 143 Brazil Coeff. p-value 0.2458 0.161 0.0363 0.944 -0.8627*** 0.000 2.6086*** 0.000 0.0588 0.723 -1.1523*** 0.003 -0.4730 0.332 0.4022 0.755 -0.0254 0.697 0.3773 0.432 0.5292 0.175 0.6771 0.452 -0.2313 0.339 0.3750 0.179 -1.0280** 0.019 -12.7157** 0.000 0.189 0.035 253 761 Mexico Coeff. p-value -0.0080 0.967 -1.3753* 0.089 0.5083 0.365 2.3607** 0.012 0.0809 0.523 -0.2402 0.341 -------0.6558 0.581 0.0211 0.741 -0.3933 0.489 0.1365 0.792 0.9578 0.253 -0.0990 0.604 0.1149 0.523 -------7.2634* 0.051 0.106 0.006 108 374 Notes: The sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and one crisis year. The Brazilian crisis period is defined as the year 1999. The coefficients on the interaction terms represent the difference in the effect of the variable on cash holdings between the crisis and pre-crisis period. Variable definitions are provided in the Appendix. *** (**) (*) – Coefficient estimate is significant at the 1% (5%) (10%) level 36 Table 4 Fixed Effects Models of Tobin’s Q before and during the Mexican Crisis, December 1990 – December 1995 Dependent variable: Tobin’s Q = (Market Capitalization + ST Debt +LT Debt)/Net Assets) Pooled Argentina Brazil Coeff. p-value Coeff. pCoeff. p-value value Size (natural log) -6.6136*** 0.000 -0.2738** 0.042 -7.6707*** 0.000 Leverage 0.4995 0.738 -0.3570 0.348 0.5409 0.746 Net Working Capital 0.8247 0.478 -0.4128 0.259 -0.1806 0.890 Operating Profit -1.8666 0.153 3.3445*** 0.000 -2.1938 0.116 Dividend Dummy -0.2621 0.422 -0.1987* 0.068 -0.2835 0.434 ADR Dummy 2.9123** 0.021 -0.6229*** 0.008 2.5329 0.531 Cash Holdings 0.2299** 0.024 0.0889*** 0.001 0.1892* 0.093 Crisis Dummy 3.7990 0.235 1.0589 0.275 3.8356 0.283 Size*Crisis 0.0329 0.830 -0.0852* 0.073 0.1338 0.437 Leverage*Crisis -3.3863** 0.023 0.3717 0.363 -3.1795* 0.068 NWC*Crisis -3.5629*** 0.002 0.2140 0.578 -2.6544** 0.043 Operating Profit*Crisis 0.0816 0.968 -0.5431 0.567 0.7796 0.724 Dividend*Crisis 1.0907** 0.028 0.1062 0.439 1.1144* 0.055 ADR Dummy*Crisis -3.5593*** 0.002 0.3662* 0.058 -2.2409 0.584 Cash Holdings*Crisis 0.1085 0.380 -0.0428 0.276 0.2316* 0.095 Constant 130.178*** 0.000 7.0294*** 0.008 148.786*** 0.000 Within R2 Overall R2 Number of firms No. of firm-year obs. 0.319 0.012 346 1,407 0.830 0.002 39 99 0.370 0.019 241 1,130 Mexico Coeff. p-value 0.3248 1.2584 1.0075 7.4466*** -0.2931 0.0527 0.1441 -0.7549 0.0172 0.3977 -0.2327 -1.8675 0.1832 -0.2058 -0.0144 -4.9483 0.456 0.106 66 178 Notes: The sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and one crisis year. The Mexican crisis period is defined as the years 1994-1995. The coefficients on the interaction terms represent the difference in the effect of the variable on Tobin’s Q between the crisis and pre-crisis period. Variable definitions are provided in the Appendix. *** (**) (*) – Coefficient estimate is significant at the 1% (5%) (10%) level 37 0.255 0.217 0.228 0.000 0.172 0.835 0.150 0.724 0.857 0.570 0.764 0.253 0.431 0.399 0.885 0.396 Table 5 Fixed Effects Models of Tobin’s Q before and during the Brazilian Crisis, December 1996 – December 1999 Dependent variable: Tobin’s Q = (Market Capitalization + ST Debt +LT Debt)/Net Assets) Pooled Argentina Brazil Size (natural log) Leverage Net Working Capital Operating Profit Dividend Dummy ADR Dummy Cash Holdings Free Float Cash Holdings*Free Float Crisis Dummy Size*Crisis Leverage*Crisis NWC*Crisis Operating Profit*Crisis Dividend*Crisis ADR Dummy*Crisis Cash Holdings*Crisis Free Float*Crisis Cash*Free Float*Crisis Constant Within R2 Overall R2 Number of firms No. of firm-year obs. Coeff. -0.2533*** -0.0894 -0.9986*** 0.1742 0.1124** -0.0656 0.0639*** -------2.2919*** 0.0877*** 0.4782*** 0.4200*** 1.3781*** 0.0435 -0.1810** -0.0321 ------6.3547*** 0.315 0.040 403 1,278 p-value 0.000 0.626 0.000 0.360 0.025 0.562 0.000 ------0.000 0.000 0.004 0.000 0.002 0.540 0.014 0.132 ------0.000 Coeff. -0.2745* 0.3663 0.3309 0.4624* 0.0531 -0.3374 0.0462 -------2.0257** 0.0815* 0.2454 0.5358 -0.4401 -0.0755 0.0531 -0.0409 ------6.6172** 0.248 0.060 42 143 p-value 0.066 0.474 0.395 0.095 0.565 0.290 0.136 ------0.029 0.066 0.583 0.132 0.634 0.624 0.672 0.539 ------0.021 Coeff. -0.0782 0.0013 -1.0387*** 0.0959 0.1265*** -0.1939* 0.0236* 0.1412 ----0.5463 0.0439** 0.4643*** 0.6039*** 0.9236*** -0.1309* 0.0857 0.0398** 0.0226 ---2.1722** 0.626 0.335 253 761 p-value 0.117 0.993 0.000 0.532 0.007 0.078 0.089 0.306 ---0.163 0.018 0.001 0.000 0.000 0.063 0.277 0.019 0.856 ---0.033 Brazil (with cash*free float) Coeff. p-value -0.0908* 0.071 0.0317 0.829 -1.0428*** 0.000 0.1661 0.294 0.1282*** 0.007 -0.1979* 0.072 0.0062 0.825 0.4380 0.347 0.0422 0.481 -0.2360 0.582 0.0488*** 0.009 0.4436*** 0.001 0.6303*** 0.000 0.8707*** 0.001 -0.1376* 0.051 0.0782 0.323 0.0890*** 0.007 -1.0551* 0.088 -0.1347* 0.077 2.2881** 0.029 0.628 0.329 253 761 Mexico Coeff. -0.3051* -0.5742 1.3080** -0.7346 0.2900** -0.1720 0.2080*** -------6.2558*** 0.1937*** -0.3168 -0.2280 2.2146*** -0.2620 -0.1669 -0.2846*** ------8.9947** p-value 0.090 0.450 0.013 0.409 0.015 0.469 0.001 ------0.000 0.002 0.561 0.639 0.006 0.143 0.322 0.000 ------0.011 0.250 0.096 108 374 Notes: The sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and one crisis year. The Brazilian crisis period is defined as the year 1999. The coefficients on the interaction terms represent the difference in the effect of the variable on Tobin’s Q between the crisis and pre-crisis period. Variable definitions are provided in the Appendix. *** (**) (*) – Coefficient estimate is significant at the 1% (5%) (10%) level 38 Table 6 Market Value Models for Mexican and Brazilian Crises Mexican Crisis Analysis Period: December 1990 – December 1995 Brazilian Crisis Analysis Period: December 1996 – December 1999 Dependent variable: Market Value = Market Capitalization + ST Debt + LT Debt Mexican Crisis Brazilian Crisis Brazilian Crisis All Countries All Countries Brazil Only (with free float) Coeff. p-value Coeff. p-value Coeff. p-value Size (natural log) 0.3821*** 0.000 0.6342*** 0.000 0.6679*** 0.002 Leverage 0.7084 0.116 2.4966*** 0.000 2.6501*** 0.000 Net Working Capital 1.0988*** 0.002 -0.0663 0.728 -0.0859 0.677 Operating Profit 0.3156 0.423 0.6304 0.262 0.5609 0.397 Dividend Dummy -0.0078 0.937 0.1494 0.314 0.1523 0.453 ADR Dummy 2.1164*** 0.000 -0.5426 0.105 -0.3708 0.435 Cash Holdings 0.0151 0.623 0.0072 0.887 0.0146 0.807 Free Float -------------0.8535 0.153 Cash Holdings*Free Float ------------------Crisis Dummy -11.507*** 0.000 -2.8472** 0.028 0.7488 0.658 Size*Crisis 0.5686*** 0.000 0.1505** 0.016 -0.0497 0.533 Leverage*Crisis -0.3548 0.430 -0.7133 0.146 -0.8004 0.172 NWC*Crisis -1.1960*** 0.001 -0.2892 0.471 -0.2202 0.643 Operating Profit*Crisis -0.7876 0.192 2.7973*** 0.002 3.0786*** 0.006 Dividend *Crisis 0.0387 0.795 -0.2289 0.276 -0.2421 0.426 ADR Dummy*Crisis -2.2749*** 0.000 0.1500 0.493 -0.0570 0.867 Cash Holdings*Crisis -0.0639* 0.087 -0.0007 0.991 -0.0163 0.824 Free Float*Crisis ------------0.5600 0.297 Cash*Free Float*Crisis ------------------Constant -6.7324*** 0.000 -12.0388*** 0.000 -12.5641*** 0.004 Within R2 Overall R2 Number of firms No. of firm-year obs. 0.226 0.341 346 1,407 0.086 0.243 403 1,278 0.086 0.245 253 761 Brazilian Crisis Brazil Only (with cash*free float) Coeff. p-value 0.6583*** 0.003 2.7253*** 0.000 -0.0646 0.757 0.6586 0.336 0.1560 0.443 -0.3551 0.455 -0.1026 0.402 1.2471 0.536 0.2841 0.273 1.2450 0.502 -0.0352 0.663 -0.8594 0.145 -0.1709 0.722 2.9525*** 0.009 -0.2349 0.441 -0.0924 0.787 0.0852 0.548 -1.3471 0.614 -0.2585 0.433 -13.2796*** 0.003 0.088 0.244 253 761 Notes: The sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and one crisis year. The Brazilian crisis period is defined as the year 1999. The coefficients on the interaction terms represent the difference in the effect of the variable on Tobin’s Q between the crisis and pre-crisis period. Variable definitions are provided in the Appendix. *** (**) (*) – Coefficient estimate is significant at the 1% (5%) (10%) level 39 Table 7 Cash Holdings and Firm Value for Brazilian Crisis with Two-Year Crisis Period, December 1996 – December 1999 Dependent variables: Cash Holdings = ln(Cash & ST Investments/Net Assets) Tobin’s Q = (Market Capitalization + ST Debt +LT Debt)/Net Assets) Cash Holdings Cash Holdings All Countries Brazil Only (with free float) Size (natural log) Leverage Net Working Capital Operating Profit Dividend Dummy ADR Dummy Cash Holdings Free Float Cash Holdings*Free Float Crisis Dummy Size*Crisis Leverage*Crisis NWC*Crisis Operating Profit*Crisis Dividend *Crisis ADR Dummy*Crisis Cash Holdings*Crisis Free Float*Crisis Cash*Free Float*Crisis Constant Within R2 Overall R2 Number of firms No. of firm-year obs. Coeff. 0.1430 -0.4724 -0.8243*** 2.1485*** 0.0696 -0.5646** ----------0.8700 0.0318 -0.1139 -0.1678 -0.2870 -0.0159 0.0921 ----------10.5851*** 0.113 0.023 432 1,355 p-value 0.209 0.262 0.000 0.000 0.561 0.023 ---------0.300 0.472 0.759 0.487 0.602 0.907 0.527 ---------0.000 Coeff. 0.3912* 0.0319 -0.8239*** 3.9367*** -0.0249 -1.2371*** ----0.1224 ---0.9753 -0.0363 -0.2481 -0.1217 -2.0531** 0.0890 0.2374 ----0.7655* ----15.8535** 0.162 0.037 267 797 p-value 0.015 0.958 0.000 0.000 0.894 0.003 ---0.816 ---0.479 0.601 0.659 0.696 0.018 0.688 0.388 ---0.077 ---0.000 Tobin’s Q All Countries Coeff. -0.2168*** -0.3134* -0.9544*** -0.2024*** 0.1076** 0.2106* 0.0806*** -------3.0228*** 0.1029*** 0.7292*** 0.4146*** 0.8762*** 0.0168 -0.3492*** -0.0675*** ------5.8974*** 0.377 0.096 432 1,355 p-value 0.000 0.087 0.000 0.394 0.040 0.052 0.000 ------0.000 0.000 0.000 0.000 0.000 0.779 0.000 0.000 ------0.000 Tobin’s Q Brazil Only (with free float) Coeff. -0.0475 -0.1431 -1.0720*** 0.5617** 0.1629*** -0.0256 0.0023 0.1136 ---0.3386 -0.0006 0.5752*** 0.6898*** -0.1948 -0.1522** 0.0367 0.0404** -0.1014 ---1.4018 0.574 0.365 267 797 p-value 0.326 0.424 0.000 0.040 0.004 0.837 0.890 0.472 ---0.445 0.976 0.001 0.000 0.466 0.026 0.654 0.015 0.439 ---0.161 Tobin’s Q Brazil Only (with cash*free float) Coeff. -0.0554 -0.1253 -1.0787*** 0.5872** 0.1619*** -0.0334 0.0150 -0.1219 -0.0285 0.4403 0.0027 0.5536*** 0.6898*** -0.2126 -0.1548** 0.0305 0.0597* -0.5260 -0.0518 1.6622 p-value 0.256 0.490 0.000 0.032 0.004 0.788 0.636 0.818 0.680 0.337 0.899 0.001 0.000 0.428 0.024 0.712 0.067 0.358 0.484 0.105 0.576 0.359 267 797 Notes: The sample consists of non-financial firms in Argentina, Brazil, and Mexico with available values of all variables during at least one pre-crisis year and one crisis year. The Brazilian crisis period is defined as the years 1998-1999. The coefficients on the interaction terms represent the difference in the effect of the variable on Tobin’s Q between the crisis and pre-crisis period. Variable definitions are provided in the Appendix. *** (**) (*) – Coefficient estimate is significant at the 1% (5%) (10%) level 40