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

43 Pages Posted: 11 Dec 2010 Last revised: 3 Apr 2012

Huasheng Gao

Nanyang Technological University

Jarrad Harford

University of Washington

Kai Li

University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)

Date Written: March 21, 2012

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

Suggested Citation

Gao, Huasheng and Harford, Jarrad and Li, Kai, Determinants of Corporate Cash Policy: A Comparison of Public and Private Firms (March 21, 2012). Available at SSRN: https://ssrn.com/abstract=1722123 or http://dx.doi.org/10.2139/ssrn.1722123

Huasheng Gao (Contact Author)

Nanyang Technological University ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www3.ntu.edu.sg/home/hsgao/

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8353 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~kaili

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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