Working Paper | HBS Working Paper Series | 2014

Comparing the Cash Policies of Public and Private Firms

by Joan Farre-Mensa


I document that the cash-to-assets ratio of public U.S. firms is on average over ten percentage points higher than that of privately held firms. This difference is not uniform: While precautionary motives lead smaller and riskier public firms to have higher cash holdings than larger and safer ones, I find that private firms have little demand for precautionary cash, regardless of their size or risk. As a result, the cash gap between public and private firms is decreasing in firm size and increasing in firm risk. My results suggest that differences in the extent to which public and private firms are subject to misvaluation shocks and engage in market timing in response to these shocks are a key driver of public firms' higher demand for precautionary cash.

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;


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