The Benefits of Selective Disclosure: Evidence from Private Firms

Abstract

Private firms’ ability to communicate confidentially with selected investors implies that valuation disagreements between firms and investors are larger at public firms than at private ones. Consistent with the notion that misvaluation concerns lead public firms to hoard cash to be able to optimize the timing of their equity issues, I show that small and medium public firms hold substantially more cash than similar-sized private ones. This difference is driven by public firms with high misvaluation exposure, which use their cash to avoid raising equity when they are hit by a cash flow shock and their equity is likely undervalued.

Keywords: Private companies; Selective disclosure; Corporate cash; Precautionary motives; Market timing; Share issuance; IPOs

JEL Classification: G32; L26; D22