Investment and Financing Decisions of Private and Public Firms
55 Pages Posted: 8 Mar 2016 Last revised: 20 Jan 2018
Date Written: January 2018
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: Suggested Citation