Evidence on the Determinants of Cash Holdings By Private and Public Companies

Abstract

We examine the determinants of cash holdings in private and public companies. Using a sample of more than 280,000 U.K. private firms and 970,000 firm-year observations from the 1994-2010 period we show that cash holdings in private firms support both the trade-off theory and the financing hierarchy theory. The results indicate that cash holdings in private firms decrease significantly with size, net working capital and leverage. The evidence also shows that private firms that pay dividends hold more cash and that cash holdings increase significantly with capital expenditures and cash flow volatility. We also examine the relation between cash holdings and ownership and management structures in private firms. We find that firms with less severe agency problems hold significantly more cash than private firms associated with more severe agency problems. We also present results for publicly traded companies. We find that both private and public firms adjust cash holdings to target levels but adjustments tend to be greater for private companies.