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Investment and financing decisions of private and public firms
Author(s) -
Drobetz Wolfgang,
Janzen Malte,
Meier Iwan
Publication year - 2019
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12367
Subject(s) - cash flow , shareholder , incentive , monetary economics , operating cash flow , business , finance , free cash flow , agency (philosophy) , cash management , agency cost , stock (firearms) , investment (military) , principal–agent problem , tobin's q , economics , corporate governance , market economy , mechanical engineering , philosophy , epistemology , politics , political science , law , engineering
Abstract 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.