Financial Visibility and the Decision to Go Private

Abstract

This paper documents that a large fraction of the companies going private from 1990 to 2004 were fairly young IPO firms that chose to revert back to their original organizational form, and therefore to a more concentrated ownership structure. Consistent with the findings of the earlier literature examining leverage buyouts (LBOs), we find strong support for Jensen’s free cash flow hypothesis, suggesting that one key reason for firms deciding to go private is to mitigate agency problems between insiders and outside shareholders. However, our evidence also reveals that firms with small growth in analyst coverage and institutional ownership, and low stock turnover were more likely to go private and opted to do so sooner. Thus, another potential reason for restructuring by these IPO firms may be their inability to enjoy the benefits of public ownership that come from financial visibility because of their failure to attract a critical mass of security analyst coverage and investor interest.