How Costly Are External Financing and Agency for Private Firms?

We estimate the magnitude of external financing costs and manager-shareholder conflicts
for large U.S. private firms, and compare the results of the estimation to those from a
sample of comparable public firms. Large private firms face marginal equity issuance costs
for the first million dollar raised that are 2% higher than public firms. However, managerial
diversion of cash is more severe in public firms, as managers of public firms can consume
as a private benefit a fraction of corporate cash that is four times higher than managers
of private firms. Our structural estimation results also show that, in addition to agency
and external financing, large private firms differ from public firms along other economic
dimensions. Counterfactual experiments provide new insights into why many large firms
decide to remain private.