Abstract - Investment and operating strategies of public and private ﬁrms: Theory and evidence
We examine determinants of investment and operating strategies of public and private ﬁrms. In particular, we demonstrate theoretically and conﬁrm empirically that due to arguably more severe ﬁnancial constraints that private ﬁrms face, the eﬀects on these ﬁrms of diversiﬁcation of controlling owners’ portfolios and the uncertainty surrounding the ﬁrms are dramatically diﬀerent from their eﬀects on public ﬁrms. For example, public ﬁrms’ controlling shareholders’ diversiﬁca- tion is positively related to their investment and proﬁtability ratios, while the opposite relations are observed for private ﬁrms. Our theoretical and empirical results suggest that the diﬀerences between public and private ﬁrms’ external ﬁnancing costs coupled with ﬁrms’ controlling owners’ underdiversiﬁcation are at least partially responsible for the observed relations between ﬁrms’ mode of incorporation and their investment and operating strategies and outcomes.
21. May. 2013