1. Facts, Figures and Theory

The market timing argument is mainly developed within the IPO (Initial Public Offering) market (Ibbotson and Jaffe 1975; Ritter 1984; Lucas and McDonald 1990; Loughran et al. 1994; Pagano et al. 1998; Lowry 2003; Ritter and Welch 2002), but some empirical studies (Mitchell and Mulherin 1996; Brau et al. 2003) develop and find a similar regularity within takeovers that are one of the most important ways to delist a publicly traded firm. They find an increase in takeover activity during industry and economic downturns, and therefore, when information asymmetries peak. In other words, intense periods of IPO activity tend to occur when the takeover activity is relatively low and vice versa. This could help explain why IPO and going private may occur in negatively correlated waves.

Private equity investors are typically funds structured as limited partnerships with outside investors who act as passive limited partners and the private equity firm that acts as the controlling general partner (Metrick and Yasuda 2010).

In the US, the squeeze-out thresholds are regulated by State laws. For example, in Delaware, if the acquirer purchases at least 90% of the target’s shares in the tender offer, it may then squeeze out the remaining shares with a short form merger, a merger that requires no further involvement by the target’s board or stockholders. In other countries there are similar squeeze-out regulations. For example, in Germany and Italy, the squeeze-out threshold is 95% and in the UK it is 90%.

In the US, we need to distinguish shareholders of record from beneficial shareholders. The difference between the two concepts is a consequence of the fast dematerialization of shares pursued by the major stock exchanges in order to increase the efficiency of stock trading, brokerage, and clearing services (Marosi and Massoud 2007). The effect of this dematerialization process is that shareholders no longer hold paper share certificates. They hold their claims in electronic form with street names such as Goldman Sachs, Morgan Stanley, and other brokerage firms. Consequently, the number of shareholders listed in corporate records as having been issued a paper stock certificate has significantly reduced. This has also created a significant deviation between the number of beneficial shareholders, who are the actual shareholders, and the number of shareholders of record, who are the brokerage firms in which the beneficial shareholders hold their shares electronically. This means that Goldman Sachs, as the holder of the claims of thousands of beneficial shareholders, will be counted as one certificate holder (one shareholder of record). The Securities and Exchange Commission (SEC) only considers the number of shareholders of record in order to define the threshold below which a firm can delist and terminate the registration of securities under Section 12(g) of the Securities Exchange Act of 1934 that leads to the end of reporting obligations for listed firms. A formal definition of securities “held of record” is provided by the Rule 12g5-1 “Definition of securities ‘held of record’” of the Code of Federal Regulations (Title 17, Chapter II, Part 240—General Rules and Regulations, Securities Exchange Act of 1934).

Form 10 is the type of document that should be submitted to the SEC in order to make the registration statement.

Accredited investors are mainly institutional investors, high-net-worth individuals, and directors-executive officers of the issuer. For a formal definition, see Rule 501 of the Code of Federal Regulations (Title 17, Chapter II, Part 230, General Rules and Regulations, Securities Act of 1933).

Form 15 is the type of document that the firm eligible to be delisted should submit to the SEC in order to certify and notify the termination of registration of a class of securities under Section 12(g) of the Securities Exchange Act of 1934.

Small firms tend to be more opaque in providing information on their business as a result of costs related to disclosure requirements, investor relations, and potential loss of competitive advantage (Pettit and Singer 1985). Moreover, they also tend to be followed by few analysts and their shares are often neglected by large institutional investors (Freeman 1987; Draper and Paudyal 2008).

For an analytical formalization of the model, see Chemmanur and Fulghieri (1999).

The issue of the effect of a modification of the listing requirements on the going private decision is directly analyzed by Engel et al. (2007) who investigate how the enactment of the Sarbanes-Oxley Act of 2002 affected the decision to go private. They find that higher disclosure requirements imposed by the new regulation induced many small and poorly liquid firms to leave the stock market because the benefits of greater transparency, lower information acquisition costs, and higher liquidity were surpassed by the costs of compliance that each firm had to bear. The model proposed by Chemmanur and Fulghieri (1999) takes into consideration this aspect with a focus on the upper bound on the investors’ information production costs resulting from the introduction of such a regulation. We will come back both to the relationship between going private and listing requirements and to the trade-off between the costs of disclosure requirements and their benefits to investors in terms of lower information acquisition costs, lower adverse selection problems, and higher liquidity, later on in the text.

For a rigorous analytical demonstration of these results, see Subrahmanyam and Titman (1999).

For an analytical formalization of the model, see Yosha (1995).

The intuition is that, in this case, the private information is publicly disclosed but the reaction of the competitor is not strong because the quality of the innovator’s project is not high. The innovator therefore prefers to bear the higher costs of public financing rather than being perceived as being of high quality, therefore triggering a strong reaction from the competitor.

In this case, the innovator prefers private financing because a public disclosure of private information on the project may trigger a stronger reaction from the competitor.

For an analytical demonstration of these results, see Merton (1987).

Despite the fact that rights offerings have lower direct costs (i.e., fees) than public ones (Slovin et al. 2000), parallel research streams found that this method can be more expensive than a public offering due to indirect costs: (1) costs borne by shareholders to trade the rights (Hansen 1988); (2) lower market liquidity resulting from a rights offer due to the preserved higher ownership concentration (Kothare 1997); (3) wealth transfers from shareholders to convertible securities holders connected with non-neutral anti-dilution clauses (Myhal 1990); (4) possible agency costs induced by collusion between managers and underwriters (Smith 1977; Herman 1981); (5) stock price declining during the offering period, due to arbitrage activity frequently carried out by the underwriter (Singh 1997).

The debate on how to measure a firm’s financial constraint was very lively, starting with the pioneering study by Fazzari et al. (1988) and continuing with Kaplan and Zingales (1997), Fazzari et al. (2000) and Kaplan and Zingales (2000) who responded to each other.

Empirical evidence on this matter was found by Botosan (1997) and Barth et al. (2013).

Bhide (1993) has a different opinion. Most efforts to increase corporate liquidity involve an increase in the number and turnover of shareholders and, in the process, a reduction in the stability and, perhaps most importantly, the concentration of ownership. Bhide (1993) argues that increases in liquidity can weaken corporate governance in underperforming companies by making it easier for dissatisfied investors to sell their shares instead of attempting to bring about constructive change by engaging managements and boards. Coffee (1991) offers a similar thesis and argues that public ownership incurs the high shareholder dispersion that weakens the control on managers that can be carried out better by the private ownership.

The tension between liquidity and corporate control and its effect on the choice between public and private financing will be discussed in greater detail later on in the text.

Bear in mind that the bargaining phase has to start if the incumbent, after selling the shares to outside shareholders, still retains control. In contrast, if, after the IPO, he no longer has the majority of votes, the control transfer may occur independently of the incumbent agreement. The buyer, faced with the incumbent rejection of its offer, may launch a tender offer directly to dispersed shareholders. However, Zingales (1995) shows that for the initial owner, relinquishing control is never optimal.

The fact that a company is better sold in stages for considerations related to corporate control is also analyzed in Mello and Parsons (1998) and Stoughton and Zechner (1998).

θ_l and θ_h can be seen as, respectively, “low” prior beliefs (a sort of worst-case scenario) and “high” prior beliefs (a sort of best-case scenario), conditional on the appearance of a G-type project.

In this case, the project has a positive NPV of X_h − S.

In this case, for investors, the project has a negative NPV of θ_lX_G − S.

This implies that the higher the level of agreement with managers, the higher the value of the company for investors will be. This point will be demonstrated later on. However, intuitively, this result arises from the fact that when there is agreement, the value that investors attach to the project will be X_h = θ_hX_G (if the prior belief is θ_h) or θ_lS (if the prior belief is θ_l). Vice versa, in case of disagreement, the value for investors will be θ_hS (if the prior belief is θ_h for investors and θ_l for managers) or θ_lX_G = X_l (if the prior belief is θ_l for investors and θ_h for managers). In the event of agreement, managers and investors always agree in making the project or not and there is one scenario in which the project has a positive NPV for investors. In case of disagreement, the project has always a negative NPV for investors and in one scenario (when the managers’ prior belief is θ_h), the managers, according to their managerial autonomy, may decide to implement it despite investors not wanting it. This means that, ceteris paribus, the value of the company for investors is increasing in the level of agreement ρ.

The positive relationship between managerial autonomy and the perceived value of the ownership stake held by managers will be demonstrated later on.

Pagni, L., 2012. “Edison e le altre cinquanta. La grande fuga da Piazza Affari. Così la crisi ha rivoluzionato il listino della Borsa”, La Repubblica, August 18. Monti, M., 2012. “Ex quotate. La bufera sui mercati ha incrementato il numero di uscite dalla Borsa negli ultimi quattro anni. La crisi e quei 50 “addii” a Piazza Affari”, Il Sole 24 Ore, February 2.

Stothard, M., 2012. “Economic woes lead to AIM delistings”, Financial Times, January 3.

The inequality \( \widehat{\rho}>\overline{\rho} \) holds because of L, the liquidity cost under private ownership. In fact L reduces the private investors’ valuation of the company under private ownership (\( {V}_{pr}^I \)). This implies that for the private ownership to be preferred, the cutoff value of ρ_pr should be greater than \( \overline{\rho}, \) the expected level of agreement in the public market, and, in turn, the inequality \( {\rho}_{pr}>\widehat{\rho}>\overline{\rho} \) should hold.

Bear in mind that \( {\rho}_{pr}>\overline{\rho} \) leads to higher managerial autonomy and greater level of managerial effort which, in turn, give rise to higher probability of project implementation under private ownership.

Bear in mind that the managers’ total payoff under private ownership (\( {V}_{pr}^M \)) increases in managerial search effort, e, which, in turn, increases in the degree of agreement under private ownership, ρ_pr.

See also Lehn and Poulsen (1989), Denis (1992), Opler and Titman (1993) and Mehran and Peristiani (2010) for evidence that is consistent with the free cash flow hypothesis. Vice versa, Maupin et al. (1984), Kieschnick (1989, 1998) and Servaes (1994) show different results.

For example, Bebchuk et al. (2009) propose five clauses (i.e., staggered boards, limits to amend by-laws, supermajority requirements for mergers and charter amendments, poison pills, and golden parachutes) which should provide a measure of the degree of managerial entrenchment. Consequently, firms that meet these provisions are less likely to go private according to Boot et al. (2008).

In fact, for private ownership to be desirable, it has to be \( {\rho}_{pr}>\widehat{\rho}>\overline{\rho}. \) Given that managerial autonomy is increasing in ρ and managerial search effort is increasing in ρ and η, it follows that managerial search effort under public ownership will be lower than that under private ownership.

Voting shares are generally held by managers and the largest shareholders. They should therefore be less affected by trading activity. This, in turn, could further be limited by transfer restrictions that often accompany voting shares held by insiders.

Coates (2007) documents a dramatic fall, after the enactment of SOX, of the number of securities frauds alleged in significant class action lawsuits against US public companies.

Coates (2007) documents that earnings management fell after SOX. The correlation that existed before the SOX between abnormal accounting accruals—that is, accruals not predicted by standard empirical models of accruals—and the importance of an audit client to its auditor vanished after the law was passed. Investor confidence also increased after the passage of SOX. Bid-ask spreads and market depth, which were widening and falling, respectively, during 2001–2002, reflecting falling investor confidence, began to tighten and rise again in both the month and in the nine months after the legislation was passed.

Some firms, in order to escape the increased regulatory burden of SOX, go dark instead of going private. The difference is that when going dark, the firm’s shares continue to be traded on the Pink Sheets but the firm legally ceases to file SEC disclosures because the number of its shareholders has fallen below the trigger level for SEC registration, while when going private, the firm’s shares cease trading. In both cases, companies will no longer be subject to the requirements of SOX. We will go back to this difference later on.

Zingales (2007) and Halling et al. (2008) empirically show that US stock markets have been facing increased competition for trading volume from domestic markets, but the trend does not seem to be linked to SOX enactment.

According to Demirag (2015), short-termism includes those factors acting upon (or within) an organization which tend to cause decision-makers (a) to raise the discount rate above the cost of capital; and/or (b) to contract the forecast horizon beyond which future revenues are ignored altogether. Such pressures will tend to reduce the rate of investment and/or bias it toward short-term projects.

However, Shleifer and Vishny (1997) in their review of corporate governance conclude that the theories and arguments in favor of the view that US companies are relatively short sighted are remarkably short of empirical support. Anecdotal evidence comes from corporate executives who increasingly often state the excessive level of public market pressure to be the main reason for their choice to take the firm private. For example, in 2010, Burger King agreed to a $3.3 billion sale to 3G Capital. 3G Capital took the firm private and its executives and analysts said going private would free Burger King to make major changes without the distraction of pleasing Wall Street (Baertlein, L., 2010. “Burger King agrees to $3.3 billion sale to 3G Capital”, Reuters, September 2). Likewise, in 2010, Burlington Northern Santa Fe (BNSF) prepared to delist from the public markets following its takeover by Warren Buffet’s Berkshire Hathaway in a deal valued at $44 billion. Matthew Rose, chief executive of Burlington Northern Santa Fe, said it could be frustrating dealing with quarterly earnings announcements when the company’s investments were far longer term and criticized the market’s excessive focus on short-term results and the lack of a long-term perspective (Wright, R., 2010. “BNSF chief hits at short-termism”, Financial Times, February 12). Market pressure is advanced as motivation to go private also outside the US. For example, Ferretti spa, world leader in the production of luxury yachts, chose to leave the Italian stock market in 2003. Ferretti’s CEO, Norberto Ferretti, said that the company had to invest €250 million in plants and acquisitions and needed to raise capital. The firm would not have been able to pursue that strategy effectively if the market had been short sighted, not very patient, and excessively punitive toward those firms performing long-term expansion plans (Puato, A., 2002. “Quei titoli perduti”, Il Corriere della Sera, October 7).