Public vs. Private Firms : Easy Money Flows to Easy Investments

다국어 초록 (Multilingual Abstract)

This study explores the forces that distinguish public firms from private firms in Korea. Consistent with previous U.S. studies, public firms have relatively large cash holdings compared to private firms in Korea. However, the more significant difference lies in the composition of long-term (fixed) assets. Compared to private firms matched on size and industry, public firms invest considerably in intangible fixed assets (denoted by non-PP&E) but sparingly in tangible fixed assets (denoted by PP&E). Public firms allocate a substantial proportion of equity issue proceeds to investments in non- PP&E—particularly, the equity holdings of related firms—but only a paltry proportion to investments in PP&E. This tendency is more prominent for public firms that belong to Chaebol groups. However, public firms do not allocate cash flows or debt issue proceeds significantly more in favor of non- PP&E relative to PP&E. Overall, our findings suggest that in the absence of a proper governance mechanism, the advantage of issuing equity with relative ease could induce public firms to seek growth with the type of investments that are easy to implement and manage—rather than with capital expenditures that require such complications as managing factories and dealing with labor unions.

목차 (Table of Contents)

• Abstract
• 1. Introduction
• 2. Data and sample construction
• 3. Empirical results
• 3.1. Common-size financial statements for public and private firms
• 3.2. Firm characteristics that predict equity issuance for public and private firms
• 3.3. Uses of equity issue proceeds
• 3.4. Key components of intangible fixed assets
• 3.5. Additional Analyses
• 4. Concluding remarks
• Appendix
• References