Financial Visibility and the Decision to go Private

56 Pages Posted: 11 Jun 2009

See all articles by Hamid Mehran

Hamid Mehran

Independent

Stavros Peristiani

Federal Reserve Bank of New York--Retired

Multiple version iconThere are 3 versions of this paper

Date Written: June 1, 2009

Abstract

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.

Keywords: financial visibility, LBOs, going private, analyst coverage, institutional investor, insider ownership

JEL Classification: G00, G30

Suggested Citation

Mehran, Hamid and Peristiani, Stavros, Financial Visibility and the Decision to go Private (June 1, 2009). FRB of New York Staff Report No. 376, Available at SSRN: https://ssrn.com/abstract=1418021 or http://dx.doi.org/10.2139/ssrn.1418021

Stavros Peristiani

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