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Determinants of corporate cash policy: Insights from private firms

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  • Gao, Huasheng
  • Harford, Jarrad
  • Li, Kai

Abstract

We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.

Suggested Citation

  • Gao, Huasheng & Harford, Jarrad & Li, Kai, 2013. "Determinants of corporate cash policy: Insights from private firms," Journal of Financial Economics, Elsevier, vol. 109(3), pages 623-639.
    • Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:623-639
    DOI: 10.1016/j.jfineco.2013.04.008
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    More about this item

    Keywords

    Cash holdings; Financing frictions; Agency conflicts; Private firms; Excess cash; Speed of adjustment;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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