| Using a large panel dataset of firms in the United Kingdom, I compare and contrast the capital structures and financial policies of public and private firms. Compared to their public counterparts, private firms rely almost exclusively on debt financing, have significantly higher leverage ratios, and tend to avoid external capital markets leading to a greater sensitivity of their capital structures to fluctuations in their cash flows. I then argue that these differences are a manifestation of greater transactions costs faced by private firms, which I use to show that corporate financing, for both private and public firms, is best described by dynamic capital structure theories recognizing the importance of these market frictions. |
