What Do Private Equity Firms Look for in an Investment? Target Governance Provisions and Going Private Transactions

Abstract

I examine the role of governance characteristics in determining the probability of a firm undergoing a going private transaction. I find that firms with greater board control are more likely to go private while firms with strong anti-takeover provisions are more likely to be acquired by other public companies. The positive relationship between greater board control and the likelihood of going private is driven by private equity backed deals. On the other hand, the negative relationship between anti-takeover provisions and the probability of going private is driven by non private equity backed deals. In addition, I find that shareholder voting restrictions do not affect firms’ survival status while a higher number of state antitakeover laws reduces the likelihood of being acquired. Finally, abnormal returns to shareholders are much lower for going private transactions than for acquisitions by public firms. The results suggest that governance provisions affect shareholder wealth during change of control transactions by playing an important role in determining the type of acquirer.