Academic journal article Financial Management

A Competing Risks Analysis of Corporate Survival

Academic journal article Financial Management

A Competing Risks Analysis of Corporate Survival

Article excerpt

This paper investigates how the characteristics of a Hong Kong-listed firm influence its odds of going bankrupt, being acquired, and going private. A competing risks model is estimated. Our results reveal that larger firms are more vulnerable to bankruptcy, and that fast-growing firms are more likely to be acquired. We also demonstrate that undervaluation is a key driver of going private. Despite the low agency cost due to the concentrated ownership structure, the propensity of Hong Kong-listed firms to go private still increases with the level o f free cash flow.

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The survival of public firms has attracted increasing academic attention in recent years. Fama and French (2004) demonstrate that although the number of new firms listed on major US stock markets had increased from 156 per year from 1973 to 1979 to 549 per year from 1980 to 2001, over two-fifths (44.1%) were delisted within 10 years. A good number of studies have attempted to infer the relationship between the fundamentals of a listed firm and its survival. The characteristics of delisted firms are likely to differ from one another. Firms that are targets of merger and acquisition tend to be smaller in size (Schwert, 2000). Bankrupt firms generally register lower profitability, slower total assets growth, and poorer financial performance (Platt and Platt, 1990). In contrast, firms going private enjoy reasonable profits and abundant cash flow (Lehn and Poulsen, 1989; Denis, 1992; Opler and Titman, 1993). Most of the previous studies regarding delisting behavior focus on cases in the United States. Our study adds to the literature by investigating the delisting decisions of public firms in Hong Kong, a rising global financial center. (1,2) The cases in Hong Kong are of interest for several reasons. First, unlike their Western counterparts, Hong Kong-listed firms are marked by a unique feature: many of them are family businesses where the majority of shares are held directly by a handful of individuals and their family members. (3) This highly concentrated ownership structure implies that agency costs arising from the separation of ownership and control are less severe. However, conflicts of interest between the controlling and minority shareholders are likely to arise in this case (Cheung, Ran, and Stouraitis, 2006). Conventional studies, including those of Lehn and Poulsen (1989), Opler and Titman (1993), and Kieschnick (1998) investigate the impact of agency costs and growth prospects on going-private transactions. Other considerations for going private include tax benefits (Kaplan, 1989a; Newbould, Chatfield, and Anderson, 1992) and undervaluation of the share price (Halpern, Kieschnick, and Rotenberg, 1999; Weir, Laing, and Wright, 2005a, 2005b). Because concentrated ownership leads to lower agency costs and also provides entrenched controlling shareholders with an incentive to divert the resources of firms to engage in self-dealing transactions (Claessens, Djankov, and Lang, 2000; Morck, Yeung, and Yu, 2000; Fan and Wong, 2002), conventional agency cost explanations for going-private transactions may not apply to Hong Kong in the presence of the managerial entrenchment effect, thus allowing this case to contribute to the existing literature. (4) Second, because of this special ownership structure, hostile takeovers are likewise less likely to occur, making Hong Kong an ideal case for testing whether friendly takeovers are intended to create wealth through synergies (Lambrecht and Myers, 2007). (5) Moreover, as small cap corporations dominate in Hong Kong, our study also differs from the others in that we focus on the delisting behavior of these firms. (6) Finally, as the governance and disclosure regulations in Hong Kong are influenced by the United Kingdom, our results can be compared with those of the United Kingdom and the United States. (7)

Previous studies tend to separately investigate the decision to go bankrupt, go private, or to be acquired. …

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