The firm lifecycle as a determiant of going private decisions
We examine the impact of corporate lifecycle on the likelihood of becoming a voluntary going private firm. We apply the firm’s capital mix as a measure for the stage in a firm’s lifecycle. In doing so, we provide a framework and evidence on firm characteristics of going private firms. We find that the decision to go private depends on the firm’s lifecycle. Young firms, with low retained earnings are more likely to go private than mature or old firms. We also find that relative firm characteristics of going private and non-going private firms are consistent with the findings on relative firm characteristics in M & A activity research for acquirers (bidders, non-targets) vs. non-acquirer (non-bidders, and targets) and that these relative firm characteristics of going private and non-going private firms stay constant throughout all stages of the corporate lifecycle.
Keywords : going private, public to private, voluntary delistings, corporate lifecycle
Ambrose, B. W., & Megginson, W. L. (1992). The Role of Asset Structure, Ownership Structure, and Takeover Defenses in Determining Acquisition Likelihood. The Journal of Financial and Quantitative Analysis, 27(4), 575–589. doi:10.2307/2331141
Bae, S. C., Chang, K., & Kim, D. (2013). Determinants of target selection and acquirer returns: Evidence from cross-border acquisitions. International Review of Economics & Finance, 27, 552–565. doi:10.1016/j.iref.2013.01.009
Bartley, J., & Boardman, C. (1990). The relevance of inflation adjusted accounting data to the prediction of corporate takeovers. Journal of Business Finance & …, 17(1), 53–72. doi:10.1111/j.1468-5957.1990.tb00549.x
Bartley, J. W., & Boardman, C. M. (1986). Replacement-Cost-Adjusted Valuation Ratio as a Discriminator Among Takeover Target and Nontarget Firms, (Meade 1968), 41–55.
Belkaoui, A. (1978). Financial ratios as predictors of Canadian takeovers. Journal of Business Finance & Accounting, 1(March 1977), 93–109.
Bell, R. G., Moore, C. B., & Filatotchev, I. (2012). Strategic and institutional effects on foreign IPO performance: Examining the impact of country of origin, corporate governance, and host country effects. Journal of Business Venturing, 27, 197–216. doi:10.1016/j.jbusvent.2010.11.001
Bhabra, G. (2008). Potential targets: An analysis of stock price reactions to acquisition program announcements. Journal of Economics and Finance, 32(2), 158–175. doi:10.1007/s12197-007-9009-z
Bhabra, G. S. (2008). Potential targets: An analysis of stock price reactions to acquisition program announcements. Journal of Economics and Finance, 32(2), 158–175. doi:10.1007/s12197-007-9009-z
Bharath, S. T., & Dittmar, A. K. (2010). Why do firms use private equity to opt out of public markets? Review of Financial Studies, 23, 1771–1818. doi:10.1093/rfs/hhq016
Bi, X. G., & Gregory, A. (2011). Stock Market Driven Acquisitions versus the Q Theory of Takeovers: The UK Evidence. Journal of Business Finance & Accounting, 38(5-6), 628–656. doi:10.1111/j.1468-5957.2011.02234.x
Billett, M. T., Jiang, Z., & Lie, E. (2010). The effect of change-in-control covenants on takeovers: Evidence from leveraged buyouts. Journal of Corporate Finance, 16(1), 1–15. doi:10.1016/j.jcorpfin.2009.09.005
Boot, A. W. A., Gopalan, R., & Thakor, A. V. (2008). Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private? The Journal of Finance, 63(4), 2013–2059. doi:10.1111/j.1540-6261.2008.01380.x
Boubaker, S., Cellier, A., & Rouatbi, W. (2014). The sources of shareholder wealth gains from going private transactions: The role of controlling shareholders. Journal of Banking & Finance, 43, 226–246. doi:10.1016/j.jbankfin.2014.03.025
Carow, K., Heron, R., & Saxton, T. (2004). Do early birds get the returns? An empirical investigation of early-mover advantages in acquisitions. Strategic Management Journal, 25(6), 563–585. doi:10.1002/smj.404
Christensen, H. K., & Montgomery, C. A. (1981). Corporate economic performance: Diversification strategy versus market structure. Strategic Management Journal, 2(4), 327–343. doi:10.1002/smj.4250020402
Company, P., Jensen, C., & Meckling, H. (1976). THEORY OF THE FIRM?: MANAGERIAL BEHAVIOR , AGENCY COSTS AND OWNERSHIP STRUCTURE I . Introduction and summary In this paper WC draw on recent progress in the theory of ( 1 ) property rights , firm . In addition to tying together elements of the theory of e, 3, 305–360.
Davis, G. F., & Stout, S. K. (1992). Organization Theory and the Market for Corporate Control: A Dynamic Analysis of the Characteristics of Large Takeover Targets, 1980-1990. Administrative Science Quarterly, 37, 605–633. doi:10.2307/2393474
DeAngelo, H., DeAngelo, L., & Rice, E. M. (1984). Going Private: Minority Freezeouts and Stockholder Wealth. The Journal of Law and Economics. doi:10.1086/467070
DeAngelo, H., DeAngelo, L., & Stulz, R. (2006). Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory. Journal of Financial Economics, 81(2), 227–254. doi:10.1016/j.jfineco.2005.07.005
Denis, D. (1992). Corporate investment decisions and corporate control: Evidence from going-private transactions. Financial Management, 21(3), 80–94. Retrieved from http://www.jstor.org/stable/3666021
Dietrich, J. K., & California, S. (1984). An Application of Logit Analysis to Prediction of Merger Targets, 10017, 393–402.
Evans, J., Poa, M., & Rath, S. (2005). The Financial and Governance Characteristics of Australian Companies Going Private. International Journal of Business Studies, 13(1), 1–24.
Fama, E., & Miller, M. (1972). The theory of finance. Retrieved from http://scholar.google.com/scholar?hl=en&btnG=Search&q=intitle:The+Theory+of+Finance#0
Gaughan, P. (2011). Mergers, acquisitions, and corporate restructurings (5th. ed.).
Gaver, J. J., & Gaver, K. M. (1993). Jennifer J. Gaver and Kenneth M. Gaver, 16, 125–160.
Gleason, K., Payne, B., & Wiggenhorn, J. (2007). An empirical investigation of going private decisions of US firms. Journal of Economics and Finance, 31(2), 207–218. Retrieved from http://link.springer.com/article/10.1007/BF02751643
Grabowski, H. G., & Mueller, D. C. (1975). Life-Cycle Effects on Corporate Returns on Retentions. The Review of Economics and Statistics, 57(4), 400–409. doi:10.2307/1935899
Greiner, L. (1997). Evolution and revolution as organizations grow. 1972. Harvard business review, 76(3), 55–60, 62–6, 68.
Gutsche, R. (2013). Determinants of M&A Activity and Control Concept—Firm Characteristics as Economic Indicators for Control in Business Combinations. Available at SSRN 2205914.
Halpern, P., Kieschnick, R., & Rotenberg, W. (1999). On the heterogeneity of leveraged going private transactions. Review of Financial Studies, 12, 281–309. doi:10.1093/rfs/12.2.281
Harris, R., & Stewart, J. (1982). Characteristics of acquired firms: fixed and random coefficients probit analyses. Southern Economic, 49(1), 164–184.
Hasbrouck, J. (1985). q and Other Measures, 9, 351–362.
Jensen, M. C. (1986). The Free Cash Flow Theory of Takeovers?: A Financial Perspectfve on Met ’ gets and Acq uisitions and ~ he Economy.
Jensen, M. C. (1987). The Free Cash Flow Theory of Takeovers?: A Financial Perspective on Mergers and Acquisitions and the Economy. In The Merger Boom; Proceedings of a Conference Held in October 1987 (pp. 102–143). doi:http://dx.doi.org/10.2139/ssrn.350422
Jensen, M. C. (1988). Takeovers: Their causes and consequences. The Journal of Economic Perspectives, 2(1), 21–48.
Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics, 11(1–4), 5–50. doi:10.1016/0304-405X(83)90004-1
Kieschnick, R. L. (1989). Management Buyouts of Public Coroprations: An Analysis of Prior Characteristics. In Y. Amihud, Leveraged management buyouts: causes and consequences (pp. 35-70). Homewood: Dow Jones-Irwin.
Kieschnick, R. L. (1998). Free cash flow and stockholder gains in going private transactions revisited. Journal of Business Finance & Accounting, 25(March 1998), 187–202. Retrieved from http://onlinelibrary.wiley.com/doi/10.1111/1468-5957.00183/abstract
Krishnan, C. N. V., Ivanov, V. I., Masulis, R. W., & Singh, A. K. (2011). Venture Capital Reputation, Post-IPO Performance, and Corporate Governance. Journal of Financial and Quantitative Analysis. doi:10.1017/S0022109011000251
Lehn, K., & Poulsen, A. (1989). Free cash flow and stockholder gains in going private transactions. The Journal of Finance, 44(3), 771–787. doi:Article
Loh, L. (1992). Financial characteristics of leveraged buyouts. Journal of Business Research, 24(3), 241–252. doi:10.1016/0148-2963(92)90021-3
Louis, H., & Robinson, D. (2005). Do managers credibly use accruals to signal private information? Evidence from the pricing of discretionary accruals around stock splits. Journal of Accounting and Economics, 39, 361–380. doi:10.1016/j.jacceco.2004.07.004
Marris, R. (1964). The economic theory of managerial capitalism. The Economic Journal, 75, 403–404. doi:10.2307/2229434
Maupin, R. (1984). n Empirical Investigation of the Characteristics of Publicly-Quoted Corporations which Change to Closely-Held Ownership through Management Buyouts. Journal of Business Finance & Accounting, 11(4), 435–450. doi:10.1111/j.1468-5957.1984.tb00762.x
Maupin, R. (1987). Financial and stock market variables as predictors of management buyouts. Strategic Management Journal, 8(4), 319–327. doi:10.1002/smj.4250080403
Mehran, H., & Peristiani, S. (2010). Financial visibility and the decision to go private. Review of Financial Studies, 23(2), 519–547. doi:10.1093/rfs/hhp044
Miller, D., & Friesen, P. (1984). A longitudinal study of the corporate life cycle. Management science, 30(10), 1161–1183. doi:10.1287/mnsc.30.10.1161
Owen, S., & Yawson, A. (2010). Corporate life cycle and M&A activity. Journal of banking & finance, 34(2), 427–440.
Palepu, K. (1982). A probabilistic model of corporate acquisitions. Retrieved from http://dspace.mit.edu/handle/1721.1/15688
Palepu, K. G. (1986). Predicting takeover targets: A methodological and empirical analysis. Journal of Accounting and Economics, 8(1), 3–35. doi:10.1016/0165-4101(86)90008-X
Powell, R. G. (2004). Takeover Prediction Models and Portfolio Strategies?: A Multinomial Approach, 8(1), 35–72.
Renneboog, L., Simons, T., & Wright, M. (2007). Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation. Journal of Corporate Finance, 13(4), 591–628. doi:10.1016/j.jcorpfin.2007.04.005
Ritter, J. A. Y. R., & Welch, I. V. O. (2002). A Review of IPO Activity , Pricing , and Allocations, LVII(4), 1795–1828.
Rumelt, R. P. (1982). Diversification strategy and profitability. Strategic Management Journal, 3(4), 359–369. doi:10.1002/smj.4250030407
Rydqvist, K., & Högholm, K. (1995). Going public in the 1980s: Evidence from Sweden. European Financial Management, 1(3), 287–315. doi:10.1111/j.1468-036X.1995.tb00021.x
Shim, J., & Okamuro, H. (2011). Does ownership matter in mergers? A comparative study of the causes and consequences of mergers by family and non-family firms. Journal of Banking & Finance, 35(1), 193–203. doi:10.1016/j.jbankfin.2010.07.027
Shleifer, A., & Vishny, R. W. (2003). Stock market driven acquisitions. Journal of Financial Economics, 70(3), 295–311. doi:10.1016/S0304-405X(03)00211-3
Singh, A. (1975). Take-overs, Economic Natural Selection, and the Theory of The Firm: Evidence from the Postwar. The Economic Journal, 85(339), 497–515.
Sorensen, D. E. (2000). Characteristics of merging firms. Journal of Economics and Business, 52(5), 423–433. doi:10.1016/S0148-6195(00)00028-X
Stevens, D. (1973). Financial characteristics of merged firms: A multivariate analysis. Journal of Financial and Quantitative Analysis, 8, 149–158.
Stimpert, J., & Duhaime, I. (1997). Seeing the big picture: The influence of industry, diversification, and business strategy on performance. Academy of Management Journal, 40(3), 560–583.
Stubbart, C. I., & Knight, M. B. (2006). The case of the disappearing firms: empirical evidence and implications. Journal of Organizational Behavior, 27(1), 79–100. doi:10.1002/job.361
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of money, credit and banking, 1(1), 15–29. doi:10.2307/1991374
Trahan, E., & Shawky, H. (1992). Financial characteristics of acquiring firms: an industry specific approach. Review of Financial Economics. Retrieved from http://scholar.google.com/scholar?hl=en&btnG=Search&q=intitle:Financial+characteristics+of+acquiring+firms+An+industry+specific+approach#0
Tsagkanos, A. (2008). Identification of Greek takeover targets and coherent policy implications. Review of Development Economics, 12(1), 180–192.
Weir, C., Laing, D., & Wright, M. (n.d.). Incentive effects , monitoring mechanisms and the market for corporate control?: an analysis of the factors affecting public to private transactions in the UK, 1–51.
Wi Saeng Kim, & Lyn, E. O. (1991). Going Private: Corporate Restructuring Under Information Asymmetry and Agency Problems. Journal of Business Finance & Accounting, 18(5), 637–648.