Financial Conservatism of Private Firms
25 Pages Posted: 15 Jan 2014 Last revised: 25 Aug 2014
Date Written: November 30, 2013
Abstract
The aim of this paper is to analyze the factors that motivate private firms to follow a conservative financial policy. Using a new definition of financial conservatism, we investigate a sample of 21,959 Italian private firms for the 1998-2006 period and look for the determinants of financial conservatism according to the main theories of capital structure and financing policy. Our findings show that financially conservative firms are smaller, with more intangible and less tangible assets, lower effective tax rates and follow a pecking order style financial policy. As has been found for their public counterparts, financially conservative private firms seem to pile up cash and their leverage potential before undertaking future investments.
Keywords: Private Firms, Financial conservatism, Net Financial Position, Leverage, Capital Structure
JEL Classification: G32
Suggested Citation: Suggested Citation