Retention of cash, operational performance and value: a study in the brazilian capital market

Abstract

The classical theory of cash management states that cash holding may negatively affect the profits of firms. The aim of this study is to investigate the relationship between cash holdings and operational performance of Brazilian publicly traded firms. Using panel data from 167 Brazilian firms from 1995 to 2009 and applying the pooled-OLS and system-GMM methods, it is possible to establish a strong and statistically significant relationship between performance and high cash holdings. The results show that the performance measured by Return on Assets (ROA) and the market value assessed by the Market-to-Book ratio are positively affected by the firms' retention of cash. In short, we conclude that the retention of large amounts of cash can be considered a viable competitive strategy for firms, contrary to the classical theory on the subject.