Public and private rms

A new strand of the literature tests the di¤erences between public and private …rms’cash holdings. Gao et al. (2013) are the …rst to test cash holdings’ di¤erences among public and private …rms. Speci…cally, they test whether public …rms hold less cash then their private counterparts. This is based on the assumption that public …rms have lower cost of accessing external capital and therefore, the precautionary motive should be lower for public …rms. However, Gao et al. (2013) argue that public …rms can have lower cash reserves than their private counterparts. This is based on the idea that public …rms su¤er from higher agency costs. Private …rms have less shareholders and are managed by normally owners with greater control.

To test the above-mentioned hypothesis, each private …rm in the sample is matched with a public …rm in the same industry and closest in size. A matching with replacement procedure is used. In the end, their …nal sample include 7,879 unique public …rms, 2,624 matched public …rms, 3,604 private …rms for the period 1995-2011.

Following the previous literature (Opler et al., 1999; Dittmar and Mahrt-Smith, 2007), the authors use cash holdings as a function of a set of …rm-speci…c characteristics (i.e. size, cash ‡ow, cash ‡ow volatility, sales growth, leverage, public debt,net working capital, capital expenditures, acquisition, R&D, dividend, age, dividends, number of segments) and a dummy variable public which assumes the value of 1 for public …rms, and 0 otherwise.

Empirical …ndings suggest that public …rms hold more cash than their private coun- terparts which is in line with the agency cost motive. Furthermore, Gao et al. (2013) investigate the speed of adjustment of …rms to their target cash levels and how …rms react to excess cash. Gao et al. (2013) employ a partial adjustment model. They conclude that public …rms adjust their cash holdings much faster towards their target levels than do private …rms when holdings less cash. Finally, they also test whether the speed of public …rms adjustment is a¤ected by corporate governance using the insider ownership and the

E-index.50 _{Results indicate that well-governed public …rms are slower in adjusting down}

to target cash levels comparing with governed public …rms.

In a similar setting, Farre-Mensa (2014) explores the cash di¤erences between U.S. 50_{Note that E-index corresponds to the entrenchment index developed by Bebchuk et al. (2009).}

public and private …rms. The author employs a sample of 66,092 …rm-year observations for private …rms and 26,751 …rm-year observations for public …rms from 2002 to 2011. Farre- Mensa (2014) follow the cash model of Bates et al. (2009) and uses an OLS regression. Results show that the cash-to-assets ratio of public …rms is higher than their private counterparts and that the cash di¤erence between public and private …rms is decreasing with size.

Similar to Gao et al. (2013) the author applies a matching procedure (i.e. calliper- based nearest-neighbour with replacement) to account for di¤erences in size and industry distribution of public and private …rms. Results are robust to their previous …ndings. Public …rms hold more cash than private …rms. Farre-Mensa (2014) concludes that the precautionary motive leads public …rms with worse access to external …nance to accumulate more cash than those with better access. Results demonstrate that the di¤erences in cash between public and private …rms is larger in industries with riskier cash ‡ows.

Finally, Hall et al. (2014) explore the behaviour of public and private …rms in a cash holding setting. The authors study cash reserves for public and private …rms from 20 emerging markets. Firstly, they test whether private …rms hold more cash than private …rms. Secondly, the authors explore whether …rms speci…c-characteristics and the national level of institutions have a di¤erent impact among private and public …rms.

The sample consists of 18,167 …rms from 18 Central and Eastern European countries from 2001 to 2010. Hall et al. (2014) use a cash holding model based on previous literature (Kim et al., 1998). They employ a pooled OLS regression in order to include the listing status of the …rms (i.e. private …rms versus public …rms) and transition indicators (i.e. transition to capitalism and markets development).

The empirical evidence demonstrates that public …rms hold less cash than their private counterparts. Firms which are located in more developed countries with better institutions tend to choose a more conservative policy increasing their cash reserves.

In addition, the authors employ three distinguish …xed e¤ects models to examine if …rm and country-speci…c determinants have a di¤erent e¤ect on private and public …rms. Firstly, they test the existence of a U-shaped form between short term debt and cash holdings for both type of …rms. They con…rm that the relation is U-shaped for both public and private …rms. Finally, they employ two models which take into account the following independent variables: maturity, return on assets, size, unemployment working capital and bankruptcy prediction variable (i.e. Z-Score). Evidence shows that the determinants of cash holdings are similar to both private and public …rms independently of the stage in the transition to capitalism. Overall the authors …nd evidence in line with the precautionary motive to hold cash.