Abstract

http://ssrn.com/abstract=967731
 
 

References (45)



 
 

Citations (2)



 


 



Going Private Buyouts and Shareholder Wealth Gains: Impact of Bankruptcy Risk


Mike Wright


Nottingham University Business School

Puliyur Sudarsanam


Cranfield University - School of Management

Jian Huang



March 2007


Abstract:     
Using a sample of 236 UK companies that went from public to private (PTP) company status during 1997 to 2005 and a control sample of similar firms not going private, we study, with logistic regression methodology, the impact of bankruptcy risk measured by their default probability, estimated using stock market data and option pricing models, on the going private decision. We also examine value gains to existing shareholders of target companies of PTP transactions. Fama-French 3 factor event study approach is used to estimate the abnormal returns around the announcement period. We find that going private companies have significantly higher default probability. They also have fewer growth opportunities, lower stock market valuation, poorer operating performance and larger pre-PTP management holding. These companies are usually small in size, suffer stock market neglect and are undervalued. Weak corporate governance factors increase the chances of going private. We report a cumulative abnormal return (CAR) of 15% for a 7 day announcement period for firms subject to going private. These returns are higher for target firms faced with higher bankruptcy risk suggesting a strong turnaround motivation for the PTP deal. Private equity firms sponsoring PTPs generate higher shareholder value gains when they acquire firms with poorer growth record, higher risk of bankruptcy and larger free cash flow suggesting they are not deterred by the risk of financial distress but consider it a value creating opportunity. High bankruptcy risk at going private increases the chance the target will end up in receivership.

Number of Pages in PDF File: 42

Keywords: going private; financial distress

JEL Classification: G32; G34

working papers series





Download This Paper

Date posted: March 6, 2007  

Suggested Citation

Wright, Mike and Sudarsanam, Puliyur and Huang, Jian, Going Private Buyouts and Shareholder Wealth Gains: Impact of Bankruptcy Risk (March 2007). Available at SSRN: http://ssrn.com/abstract=967731 or http://dx.doi.org/10.2139/ssrn.967731

Contact Information

Mike Wright (Contact Author)
Nottingham University Business School ( email )
Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5257 (Phone)
+44 115 951 5204 (Fax)
Puliyur Sudi Sudarsanam
Cranfield University - School of Management ( email )
Bedfordshire, MK43 0AL
United Kingdom
No contact information is available for Jian Huang
Feedback to SSRN


Paper statistics
Abstract Views: 2,335
Downloads: 510
Download Rank: 30,649
References:  45
Citations:  2

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.297 seconds