Financial Visibility and the Decision to Go Private - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Financial Visibility and the Decision to Go Private

June 2009 Number 376

JEL classification: G00, G30

Authors: Hamid Mehran and Stavros Peristiani

A large fraction of the companies that went private between 1990 and 2007 were fairly young public firms, often with the same management team making the crucial restructuring decisions both at the time of the initial public offering (IPO) and the buyout. Why did these public firms decide to revert to private ownership? To answer this question, we investigate the determinants of the decision to go private over a firm’s entire public life cycle. 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.

Available only in PDF PDF

56 pages / 276 kb

For a published version of this report, see Hamid Mehran and Stavros Peristiani, "Financial Visibility and the Decision to Go Private," Review of Financial Studies 23, no. 2 (February 2010): 519-47.

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