Cash liquidity and financial constraints in relation to the market performance of Brazilian companies

Abstract

This article aimed to verify the influence of cash liquidity and financial constraints on the market performance of Brazilian companies. According to pecking order theory, organizations choose retained earnings over debts or new share issuances, which may be linked to specific costs. However, trade-off theory highlights that taxes mean that financial policy and debt can be relevant to company value. Thus, this study aims to provide new insights on these topics and knowledge for investigating cash liquidity and financial constraints in relation to performance. The cash liquidity of organizations and financial constraints are important phenomena for performance, given that, in this study, there was an increase in performance. The results suggest that organizations choose to underinvest in the setting due to the difficulty of obtaining credit. Thus, there is an evident need for organizations to present liquidity so as not to lose investment opportunities. Despite the financial constraints, the organizations represent, to some extent, a good investment option, as they prefer excess cash to resources for new investments. The population of this study is formed of companies listed on the B3 S.A. – Brasil, Bolsa, Balcão. The analysis period corresponded to the years from 2014 to 2018 and the KZ index is calculated to classify the organizations regarding their level of constraint. Next, multiple linear regression was run, controlling for year and sector fixed effects. There is a need for organizations to present liquidity to attract new investors. However, companies that find themselves financially constrained can also represent a good investment option as they choose excess cash. In the market, there are some resistances regarding financially constrained organizations, but there may be considerable liquidity in them.