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.


Evgeny Lyandres
Boston University
21. May. 2013

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