We examine theoretically and empirically potential determinants of investment and operating strategies of public and private firms that are controlled by imperfectly diversified owners. In particular, we demonstrate theoretically and confirm empirically that due to arguably more severe financial constraints that private firms face, the effects on them of factors such as the diversification of controlling owners’ portfolios and the uncertainty regarding demand for firms’ output are dramatically different from the effects on public ones. For example, public firms’ controlling shareholders’ diversification 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 are partially responsible for the observed relations between firms’ mode of incorporation and their investment and operating strategies and outcomes.