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E-MailThis post comes to us from Hamid Mehran and Stavros Peristiani of the Federal Reserve Bank of New York.
In our forthcoming Review of Financial Studies paper Financial Visibility and the Decision to Go Private we investigate the determinants of the decision to go private over a firm’s entire public life cycle.
We investigate the decision to go private by estimating several variations of the hazard model. Initially, we estimate a broad competing risk model where the decision to remain public or go private is evaluated against all alternative termination outcomes (merger, liquidation, or negative delisting). Most of our analysis, however, focuses on estimating a hazard model that excludes all other competing choices. In this case, the regression sample consists of an annual panel of observations of all IPO firms that either had an LBO or were bought by another private company and all surviving IPO firms that remained in the public market.
Our sample includes completed deals in which an IPO firm was a target in an LBO or was acquired and became a private company from January 1, 1990, to the end of October 2007. Our tests focus on those firms that 1) went public after 1988 and subsequently were buyout targets after January 1, 1990 and 2) were included in Compustat. Our final sample consisted of 262 firms (169 LBO targets and 93 non-LBO firms that were acquired by nonpublic companies or investor groups). Of these 262 IPO firms, 218 (150 LBO and 68 non-LBO targets) were followed by securities analysts.
Our evidence reveals that firms with declining growth in analyst coverage, falling institutional ownership, and low stock turnover were more likely to go private and opted to do so sooner. We argue that a primary reason behind the decision of IPO firms to abandon their public listing was a failure to attract a critical mass of financial visibility and investor interest. Consistent with the findings of earlier literature, we also find strong support for Jensen’s free-cash-flow hypothesis, which argues that these corporate restructurings are a useful tool in capital markets for mitigating agency problems between insiders and outside shareholders.
The full paper is available for download here.
One Comment
Well, of course they would go private if their public offerings weren’t attracting enough interest. That’s the whole point of going public in the first place: raising capital more easily.