Why Do Private Firms Hold Less Cash than Public Firms? International Evidence on Cash Holdings and Borrowing Costs
58 Pages Posted: 28 Aug 2016 Last revised: 11 Jan 2020
Date Written: January 9, 2020
We contend that high borrowing costs can overwhelm precautionary motives and induce low cash holdings in private firms. Supportive of our hypothesis, we find European private firms hold less cash than public firms and this differential relates to borrowing costs. Results are robust to endogeneity concerns and reveal private firms use cash flow to pay-down existing debt instead of building cash reserves. Further, stronger creditor rights and debt market development lead to convergence in cash policies of private and public firms.
Keywords: Cash Holdings, Creditor Rights, European Firms, Borrowing Costs, Precautionary Motive, Private Firms
JEL Classification: G32, G38
Suggested Citation: Suggested Citation