Academic journal article Journal of Economics and Finance

An Empirical Investigation of Going Private Decisions of U.S. Firms

Academic journal article Journal of Economics and Finance

An Empirical Investigation of Going Private Decisions of U.S. Firms

Article excerpt


According to many managers, the Sarbanes-Oxley Act of 2002 caused the costs of being public to increase. Subsequently, following the Act, many firms went private rather than incur the costs. We investigate the differences in the financial characteristics of firms that went private between 1998 and 2003 and a control sample of firms which went public and did not go private Our results indicate that there are differences in the two groups, as well as differences in firms that went private prior to and following Sarbanes-Oxley. Taken together, our results are indicative of going private to avoid the higher costs of being public post Sarbanes- Oxley.

(JEL: G 18, G34)


Although there were some going private transactions during the 1970s (DeAngelo et al., 1984), going private transactions first became popular during the 1980s. The focus at that time was on the use of going private as a form of corporate governance as well as a type of financing (Lehn and Poulsen, 1989), whether it be through a leveraged buyout or through an employee stock purchase. While these going private decisions were met with positive market responses, new tax legislation in 1986 reduced both the numbers and the profitability of these transactions (Newbould et al., 1992).

More recently, going private transactions have again come to the forefront, but this time the focus is on the cost/benefit tradeoffs of being a publicly traded firm compared to a privately held firm. Some firms have decided that meeting quarterly earnings expectations have limited their ability to expand at the same time that being public did not provide expected liquidity (Grant, 2005). Several banks that went public during the 1990s have also decided to go private by reducing the number of shareholders to less than 300, citing the increased costs of being public (Sisk, 2005).

Since previous studies have found significant positive abnormal returns when firms first announce that they are going private (Lehn and Poulsen, 1989), investors should profit if they can ascertain in advance the characteristics of firms that may choose to go private. This study makes two major contributions. First, we use discriminant analysis to determine the characteristics of firms going private compared to a matched sample of firms that went public at the same time, but which did not go private. . We find that there are significant differences in the financial characteristics of firms that choose to go private versus firms that choose to remain public.

Additionally, since the recently passed Sarbanes-Oxley law places additional costs on publicly held firms, we also test to see if the characteristics of firms going private have changed post Sarbanes-Oxley. Again, using discriminant analysis we find significant differences between firms that went private before the passage versus firms that go private following the new law.

A review of the literature ending with our two formal hypotheses is next. Section III is the Methodology and IV is the Sample and Independent Variables. Tests and Results are in Section V and the Conclusion is in Section VI.


DeAngelo et al. (1984) examine going private restructuring for the time period 1973-1980. They divide their sample into transactions where management seeks total equity ownership of the corporation and leveraged buyouts. While both will reduce the costs of being public, leverage buyouts also provide additional benefits of stronger monitoring by debt holders. They find that the stock price went up an average of 22% for the two day announcement window with the pure going privates having a 25% abnormal return and leveraged buyouts having only a 17% abnormal return. Slovin et al. (1991) find that industry rivals also benefit when firms make going private announcements. These rivals experience a statistically significant increase of 1.32% over the two day window. Thus, being able to identify potential going private firms should result in significant returns. …

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