The Decision to delist from the stock market. Theory & empirical evidence of going private

Most books link a firm’s decision to leave the stock market to the concept of buyout and analyze the causes and consequences of this corporate choice from the perspective of the buyer, the target firm, the combined entity that could result from the deal, and their shareholders. It is hardly surprising that books on buyouts are included in the merger and acquisition (M&A) literature. Delisting due to buyout is therefore merely considered an outcome of the deal and not the direct choice of the firm with its reasons and effects. Delisting can be divided into involuntary and voluntary delisting. In the first case, the company is involuntarily forced to remove itself from the stock exchange due to non-compliance with regulatory requirements or because the company has gone into bankruptcy/liquidation. Voluntary delistings are, on the other hand, a consequence of a managerial choice and in this specific case, we refer to the concept of “going private transactions” (GPT) or “public-to-private” (PTP) operations. They lead to simultaneous delisting from all lists (domestic or otherwise) without subsequent trading. When companies are delisted from one market but continue to trade in another, the transaction is called “going dark” or “deregistration”. It is not a real delisting but a form of delisting that describes a step down in the firm’s quotation cycle because the firm starts trading in markets that are less regulated or not regulated at all. In this case, a change in corporate control is not necessary. This book adopts a different approach and focuses its attention both on the voluntary and involuntary decision to remove the firm and its publicly traded shares from the stock market. This approach allows us to refocus the goal of the research work which no longer analyzes the transaction from the M&A market’s point of view but examines the motives and effects of ending the firm’s share trading. The buyout is therefore only viewed as a way of obtaining the termination of trading in the public market. The book first provides some data on the geographical and historical importance of the phenomenon and compares it with the Initial Public Offering (IPO) market in order to show how it has increased and fluctuated over time and across different stock exchanges in response to market-wide factors. It then explains the most common techniques such as mergers, reverse stock splits, tender offers, and so on, that are used to delist a firm and the US regulation that disciplines the procedure for implementing them. After clarifying the aim of the research work, the book provides the reader with a wide and systematic description of the theoretical approaches that are proposed in order to explain the choice such as information-based theories, access to capital, stock liquidity, corporate governance, listing requirements, short-termism, the use of derivatives, takeover defense, agency problems, and finally it focuses on going private in firms with highly concentrated ownership structures. Although the firm can leave the stock market in many ways, a leveraged buyout (LBO) is undeniably the most common and probably the most important method for achieving delisting. The second chapter therefore concentrates on LBOs in terms of historical trends, characteristics, and motivations. Some delisted firms do not cease to be traded on the public market but simply move from official regulated markets to either unregulated Over the Counter (OTC) markets or less regulated markets. Although the choice is partially motivated by the same reasons that drive delisting, the second chapter also highlights the specific factors that can trigger the choice, typically related to the difference between the market of origin and destination. The third chapter reviews the empirical literature. There are essentially three streams of empirical literature on delisting. The first one studies, in voluntary delisting, the link between the decision to undertake the operation and the determinants in accordance with the different theoretical models. These determinants pertain, for example, to the firm’s financial structure and performance characteristics, business characteristics, and stock liquidity. The other two literature streams highlight the reasons that lead to involuntary delisting and study the effects of delisting on firm value. Except for company size, ex-ante performance, and company age, other variables do not show clear-cut results. Small firms, firms with poor ex-ante performance and young firms are more likely to go private. In terms of value effect, voluntary delisting increases shareholders’ wealth, whereas involuntary delisting leads to value destruction. In the final chapter we analyze the link between delisting operations and agency costs by using a sample of non-financial firms which voluntarily delisted from the London Stock Exchange main market between 2010 and 2016. We also analyze the relationship with other variables such as leverage or the number of years that a firm remains listed on the stock exchange.