The market value of cash and the creation of high‐governance listings of voluntary adoption: Evidence from the Brazilian stock exchange

• Published date: 01 May 2023
• Author: Aviner Augusto Silva Manoel,Marcelo Botelho Costa Moraes,Gabriel Pereira Pündrich
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/corg.12479

ORIGINAL ARTICLE

The market value of cash and the creation of high-governance

listings of voluntary adoption: Evidence from the Brazilian

stock exchange

Aviner Augusto Silva Manoel

1

| Marcelo Botelho Costa da Moraes

2

|

Gabriel Pereira Pündrich

3

1

School of Economics, Business Administration

and Accounting in Ribeir˜ao Preto (FEA-RP),

University of S˜ao Paulo (USP), Ribeir˜ao Preto,

S˜ao Paulo, Brazil

2

Department of Accounting, School of

Economics, Business Administration and

Accounting in Ribeir˜ao Preto (FEA-RP),

University of S˜ao Paulo (USP), Ribeir˜ao Preto,

S˜ao Paulo, Brazil

3

University of Florida, Gainesville, Florida, USA

Correspondence

Aviner Augusto Silva Manoel, PhD in

Controllership and Accounting at the School of

Economics, Business Administration and

Accounting in Ribeir˜ao Preto (FEA-RP),

University of S˜ao Paulo (USP), Av. dos

Bandeirantes, 3900 - FEA-RP, 14040-905

Ribeir˜ao Preto, S˜ao Paulo, Brazil.

Email: aviner_augusto@hotmail.com

Abstract

Research Question/Issues: In this article, we analyze whether the initiative of a

domestic stock exchange that designed three high-governance listings of voluntary

adoption, in addition to maintaining its traditional listing, can mitigate managers'

ability to expropriate cash. As a result of the reduction in improper cash diversion in

firms with higher disclosure and corporate governance standards, we hypothesize

that investors place a higher value on cash in the firms that voluntarily migrate to the

premium listing.

Research Findings/Insights: After a series of robustness checks, we document that

investors place a higher value on the cash of firms from the non-mandatory premium

listing ($0.589) in relation to the cash of the companies from the regular traditional

listing ($0.239). Our findings also reveal that the market value of cash is higher in

firms from the segment with the highest standards ($0.687), where companies follow

the “one share, one vote”principle.

Theoretical/Academic Implications: The empirical results suggest that shareholders

associate the premium listings segments as a commitment that reduces the risk that

cash holdings will be converted into private benefits, and consequently, they place a

premium on the cash of companies that subject themselves to these levels. Hence,

by lessening shareholders' markdown of cash holdings, the premium listing segments

mitigate part of the value loss associated with weak governance in Brazil.

Practitioner/Policy Implications: Our results provide important policy implications by

demonstrating that a domestic stock exchange, by creating a premium listing of

voluntary adoption, can provide mechanisms for firms to self-select into segments

with greater transparency and stricter corporate governance that, in turn, send a

positive signal about the underlying risk that firms may expropriate cash. Hence,

emerging countries where reforms of corporate law are designed to protect investors

from facing serious political opposition may also consider creating special listings

such as in Brazil, as a private contractual arrangement, to increase the protection of

shareholders.

KEYWORDS

corporate governance, cash holdings, emerging economies, dual-class shares

Received: 17 August 2021 Revised: 15 June 2022 Accepted: 21 June 2022

DOI: 10.1111/corg.12479

Corp Govern Int Rev. 2023;31:515–534. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd. 515

1|INTRODUCTION

Cash holdings constitute a considerable portion of firms' total assets

and have important implications for shareholders' value and for

several strategic decisions (Beuselinck & Du, 2017; Chen, 2008;

Deloof et al., 2020; Dittmar & Mahrt-Smith, 2007; Faulkender &

Wang, 2006; Harford et al., 2008; Manoel & Moraes, 2022a;

Martínez-Sola et al., 2013; Masulis et al., 2009; Opler et al., 1999;

Pinkowitz & Williamson, 2007). The literature on cash management

has recently attracted much attention from both academia and the

press, especially driven by the large increase in cash trapped overseas

by U.S. multinational corporations (MNCs) due to repatriation tax

laws (Beuselinck & Du, 2017; Faulkender et al., 2019; Graham &

Leary, 2018; Harford et al., 2017; Manoel & Moraes, 2022b).

Despite the growing body of research about cash holdings in the

U.S. context recently, little is known about the value that shareholders

place on a dollar of cash in firms from emerging economies. Further-

more, while some papers study whether a U.S. cross-listing constrains

the private benefits embodied in cash holdings (Frésard &

Salva, 2010; Huang et al., 2013), this article is the first to analyze

whether the initiative of a domestic stock exchange from an emerging

market, which designed three high-governance listings of voluntary

adoption, in addition to maintaining its traditional listing, can mitigate

managers' ability to expropriate cash resources. By voluntarily com-

mitting to one of the three premium listings with stricter disclosure

and governance rules than those provided under the country's law, a

company can pledge to better protect its minority shareholders

(De Carvalho & Pennacchi, 2012). The creation of this bonding mech-

anism in Brazil is the focus of this research.

Analyzing the effects of the creation of the premium listing, as a

bonding mechanism, on the value that investors place on an additional

dollar of cash is particularly interesting and relevant because Brazil's

standards for protecting minority shareholders were very low at that

time. More specifically, in the early 2000s, Brazil was characterized by

weak investor protection and low disclosure standards, and the

private benefits of control were pointed out as high, and the legal

rules and firm-level governance were considered to be weak (Black

et al., 2012,2014; De Carvalho & Pennacchi, 2012). In response to

the increasing demand for superior shareholder protection and trading

fragmentation in favor of the U.S. stock exchanges in the late 1990s,

in 2000, the Brazilian stock exchange

1

launched three high-

governance listings (Black et al., 2012; Bortolon & Leal, 2014; Manoel

et al., 2018).

The three new premium listing segments (Level I, Level II, and

New Market) are of voluntary adoption. Firms that undertake these

levels are subject to good corporate governance practices and disclo-

sure requirements, which go beyond the legal minimums of Brazilian

law (Bortolon & Leal, 2014; De Carvalho & Pennacchi, 2012). The

initiative of the Brazilian Stock Market provides a unique opportunity

to analyze the effects of adopting higher disclosure and corporate

governance standards on the market value of cash and how it varies

compared with the firms that did not choose the exchange's higher

standards. Although it was not the first stock exchange to establish a

premium listing, the Brazilian stock exchange was the first to allow

previously listed companies to optionally migrate to higher

listing levels with stricter disclosure and governance standards

than the regular listing (Black et al., 2010,2012; De Carvalho &

Pennacchi, 2012; Manoel et al., 2018).

Suppose shareholders believe that firms that voluntarily adhere

to these levels are subject to improved corporate disclosure and gov-

ernance relative to the companies in the regular Brazilian listing and

that these mechanisms shrink the agency costs of free cash flow. In

this case, we hypothesize that a dollar of cash may be worth more for

them. Alternatively, if shareholders believe that these corporate

governance mechanisms cannot reduce the agency problems of free

cash flow, then a dollar of cash may not be worth more. Given the

predictions about the effects of bonding on mitigating agency costs

(Frésard & Salva, 2010; Huang et al., 2013), we hypothesize that

shareholders place a higher value on the cash holdings in firms that

voluntarily subscribe to these levels.

Using a sample of 197 companies (2293 firm-year observations)

that have shares traded on the Brazilian stock exchange from 2000 to

2018, we find that the value that investors attach to cash holdings is

substantially larger for companies listed on the premium listing

segments ($0.589) relative to firms from the traditional non-premium

listing ($0.239). The difference between the two estimates is statisti-

cally significant. Therefore, bonding in the premium listing segments

leads to a significant reduction in agency costs. As a consequence,

investors raise the value that they place on cash holdings when a firm

chooses special corporate governance segments with stricter disclo-

sure and governance standards. In contrast, aware of the greater

agency conflicts in firms from the Brazilian regular traditional listing,

investors then discount their cash holdings more heavily.

In sum, our results support our hypothesis and the agency costs

of the free cash flow theory of Jensen (1986), since we document that

shareholders place a significantly higher value on corporate cash hold-

ings in well-governed companies. Accordingly, our empirical evidence

reveals that shareholders associate the premium listing segments as a

commitment that mitigates the risk that cash holdings will be con-

verted into private benefits. Based on these facts, our results provide

important policy implications and demonstrate that a domestic stock

exchange, by creating a premium listing with improved corporate dis-

closure and governance on a voluntary basis, can provide mechanisms

for firms to self-select into more transparent reporting segments that,

in turn, send a positive signal about the underlying risk that firms may

expropriate cash resources.

In particular, the cash premium that we observe for companies

that voluntarily chose the exchange's higher standards corroborates

existing research that posits that additional disclosure requirements

and corporate governance rules put additional limits on the opportu-

nistic actions of entrenched managers and consequently, reduce the

risk of improper cash diversion. This evidence is particularly relevant

in light of the massive loss of value that an improper diversion of cash

can have on investor wealth.

We further document that a dollar of cash for the mean firm-year

in the sample has a value of $0.413 to shareholders, which indicates

516 MANOEL ET AL.