Are stock cashflows more risky4/25/2023 The search process evidenced that the studies are few and very recent, mainly after the crisis of 2008, when corporate liquidity began to be incorporated as a risk factor capable of predicting expected equity return. However, few works have studied its relationship with the expected equity return. While it is true that in the literature the study of the determinants of cash holdings accounts for the great majority of contributions, the topic has also been studied concerning other important concepts in the field of corporate finance such as the value of the firm, financial risks and corporate governance. Finally, Section 5 concludes and provides recommendations for future research and explains the implications from a perspective both theoretical and practical.Ĭash holdings have been a subject of particular interest in corporate finance for the past 20 years. Section 4 contains the results of the research. Section 3 contains the methodology and provides a deep understanding of the relationship between cash holdings, expected equity return and risk. Section 2 presents the literature review of cash holdings and expected equity return. This paper is divided into five sections. In other words, economic and financial structures vary considerably in emerging countries compared to developed countries, and the results of most of these studies for developed countries are not fully replicable and generalized in the context of Latin American economies. Given the above, there was a need to observe these relationships in emerging markets, where agency problems and information asymmetry are more pronounced because their capital markets are less developed ( Deloof, 2003). ![]() Nevertheless, these studies are concentrated exclusively in North American firms, whereas, for emerging economies, especially in Latin America, studies are scarce and information on the relationship between cash holdings, risk and expected equity return has not been researched. Therefore, if the level of cash holdings indicates various sources of risk such as cash flow volatility and financial constraints, it is expected that those firms that accumulate more liquid assets do so because they have more volatile cash flows, and therefore, high risk is associated with a higher expected equity return (Simutin, 2010). ![]() Accordingly, a high level of corporate liquidity will signal financial constraint risk and will be associated with a higher expected return ( Wang, 2012). those that have a greater correlation between their cash flows and the performance of their stocks, generally have higher cash levels, as they are more susceptible to experience cash deficits in the future (Palazzo, 2012). ![]() These studies have provided empirical evidence that firms with higher risk, i.e. Hence, it was expected that the negative relationship between information asymmetry and cash holdings found for emerging countries would impact the relationship between cash holdings and expected equity return.ĭespite being a subject of such importance, few studies address this problem, the works of Palazzo (2012) and Simutin (2010) are clear exceptions. Therefore, the degree of information asymmetry affects the levels of cash holdings, which means that firms that operate in countries where the levels of information asymmetry are higher have lower levels of cash holdings ( Chung et al., 2015). These factors have consequences for firms operating in emerging markets, generating agency problems and an increase in the costs associated with external financing. Also, the findings serve as a reference for firms in developed economies such as those of the US and Europe, whose capital markets are deeper and more developed, and therefore, do not present agency problems and information asymmetries, as is the case with markets emerging economies ( Deloof, 2003).Īccording to Uyar and Güngörmüş (2013), emerging markets differ from developed markets in the following aspects, namely, weak regulatory framework, fragile corporate governance, weak protection of minority shareholders and poor disclosure of information. While there are studies on the determinants of cash holdings, as well as studies on their relationship with the value of the firm, those about the relationship between cash holdings, risk and expected equity return are very scarce. ![]() After the financial crisis of 2008, both academics and professionals have focused their attention on the cash holdings of firms as these are thought to affect the investment prospects, the risk, and therefore, the expected profitability of the stocks in the future ( Rao et al., 2013).
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