Cash Holdings and Collateral Value. Evidence from a Quasi Natural Experiment

Abstract

We make use of the major credit reform and the new bankruptcy law empreended by Brazil at the end of 2004 and early 2005 to investigate the effect of a rise in collateral value in cash holdings. We find that more tangible firms reduced its cash holding after the passage of the law compared to less tangible firms. Also, our results suggest that more tangible firms reduced its short-term debt, corroborating the financial flexibility hypothesis.