Comparing the Cash Policies of Public and Private Firms
Harvard Business School
April 5, 2014
I document that public U.S. firms hold twice as much cash as large privately held firms, a surprising finding that is robust to three alternative identification strategies: matching, within-firm variation, and IV. Public firms’ greater access to capital accounts for about one-quarter of the difference. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. I show that the risk of misvaluation induces public firms to raise capital and accumulate cash reserves when they perceive their equity to be overvalued, resulting in greater demand for precautionary cash holdings.
Number of Pages in PDF File: 60
Keywords: Private companies; Corporate cash hoarding; Precautionary motives; Market timing; Share issuance; IPOs
JEL Classification: G32; L26; D22working papers series
Date posted: December 6, 2010 ; Last revised: April 6, 2014
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