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

See all articles by Sandra Mortal

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Natalia Reisel

Fordham University

Date Written: January 9, 2020

Abstract

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

Mortal, Sandra and Nanda, Vikram K. and Reisel, Natalia, Why Do Private Firms Hold Less Cash than Public Firms? International Evidence on Cash Holdings and Borrowing Costs (January 9, 2020). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2830709 or http://dx.doi.org/10.2139/ssrn.2830709

Sandra Mortal (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Natalia Reisel

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

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