Working Paper | HBS Working Paper Series | 2014

Comparing the Cash Policies of Public and Private Firms

by Joan Farre-Mensa

Abstract

I document that public U.S. firms hold twice as much cash as large privately held firms, a surprising finding that is robust to three alternative identification strategies: matching, within-firm variation, and instrumental variable. Public firms' greater access to capital accounts for about one-quarter of the difference. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. I show that the risk of misvaluation induces public firms to raise capital and accumulate cash reserves when they perceive their equity to be overvalued, resulting in greater demand for precautionary cash holdings.

Keywords: finance; equity; Private companies; Corporate cash hoarding; Precautionary motives; Market timing; Share issuance; IPOs; Private Ownership; Cash; Market Timing; Corporate Finance; Public Ownership; United States;

Citation:

Farre-Mensa, Joan. "Comparing the Cash Policies of Public and Private Firms." Harvard Business School Working Paper, No. 14-095, April 2014.