Investment and Financing Decisions of Private and Public Firms

38 Pages Posted: 20 Feb 2019

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/February 2019


We examine differences in the allocation of cash flow between Western European private and public firms. Public firms have a higher investment‐cash flow sensitivity than comparable private firms. This difference is not attributable to more severe financing constraints of public firms. Instead, because differences in investment‐cash flow sensitivities are only observed for the unexpected portion of firms’ cash flow, the empirical evidence supports an agency‐based explanation. Similar patterns are observable for the expected and unexpected portion of firms’ shareholder distributions. Our results are driven by firms from countries with low ownership concentration and more liquid stock markets, where shareholders have lower incentives to monitor. The results are also more pronounced for public firms with low industry Tobin's q and high free cash flow, which are more prone to suffer from agency problems.

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

Suggested Citation

Drobetz, Wolfgang and Janzen, Malte and Meier, Iwan, Investment and Financing Decisions of Private and Public Firms (January/February 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 1-2, pp. 225-262, 2019. Available at SSRN: or

Wolfgang Drobetz (Contact Author)

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148

Malte Janzen

University of Hamburg ( email )

Moorweidenstraße 18
Hamburg, 20148

Iwan Meier

HEC Montreal - Department of Finance ( email )

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

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