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Comparing the Cash Policies of Public and Private Firms

Joan Farre-Mensa

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; D22

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Date posted: December 6, 2010 ; Last revised: April 6, 2014

Suggested Citation

Farre-Mensa, Joan, Comparing the Cash Policies of Public and Private Firms (April 5, 2014). Available at SSRN: http://ssrn.com/abstract=1719204 or http://dx.doi.org/10.2139/ssrn.1719204

Contact Information

Joan Farre-Mensa (Contact Author)
Harvard Business School ( email )
Rock Center 218
Soldiers Field Road
Boston, MA 02163
United States
617-495-6963 (Phone)
HOME PAGE: http://people.hbs.edu/jfarremensa
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References:  62
Citations:  5

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