Investment and Financing Decisions of Private and Public Firms

55 Pages Posted: 8 Mar 2016 Last revised: 20 Jan 2018

See all articles by Wolfgang Drobetz

Wolfgang Drobetz

University of Hamburg

Malte Janzen

University of Hamburg

Iwan Meier

HEC Montreal - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2018

Abstract

We study the differences in the allocation of cash flow between Western European private and public firms. Public firms have a significantly higher investment-cash flow sensitivity than comparable private firms. These differences in investment-cash flow sensitivities are not due to more stringent financial constraints of public firms. Instead, our results suggest an agency-based explanation, since differences in investment-cash flow sensitivities can only be observed for the unexpected portion of firms’ cash flow. These findings are driven by firms from countries with low ownership concentration and liquid stock markets, where shareholders have lower incentives to monitor managers and rather sell their shares when discontent. Our study adds a new aspect to the ongoing debate on the effect of a stock market listing on a firm’s investment decisions.

Keywords: corporate investment, cash flow allocation, private firms, agency problems

JEL Classification: D22, D92, G31, G32, G34

Suggested Citation

Drobetz, Wolfgang and Janzen, Malte and Meier, Iwan, Investment and Financing Decisions of Private and Public Firms (January 2018). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2744492 or http://dx.doi.org/10.2139/ssrn.2744492

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Malte Janzen (Contact Author)

University of Hamburg ( email )

Moorweidenstraße 18
Hamburg, 20148
Germany

Iwan Meier

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7 H2J 2K9
Canada
(514) 340-3198 (Phone)

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