Determinants of Corporate Cash Policy: A Comparison of Public and Private Firms

Abstract

We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that on average private firms hold less than half as much cash as public firms do. The higher cash holdings of public firms are partially caused by the fact that public firms add more to their cash reserves in a given year, even controlling for a number of spending and savings factors, than do similar private firms. Further, consistent with the presence of financing frictions, we find that private firms adjust much more slowly to their target cash levels when they have a cash deficit than public firms do, and private firms’ cash-to-cash flow sensitivity is higher than that of public firms. Overall, our evidence supports both the agency conflicts and the financing frictions views of corporate cash policy.

Keywords: Cash Holdings, Cash-to-Cash Flow Sensitivity, Agency Conflicts, Financing Frictions, Private Firms

JEL Classification: G30, G32