Going Private But Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms' Going-Private Decisions
Robert P. Bartlett III
University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy
UGA Legal Studies Research Paper No. 08-003
University of Chicago Law Review, Forthcoming
This article examines whether the cost of complying with the Sarbanes-Oxley Act of 2002 (SOX) contributed to the rise in going-private transactions after its enactment. Prior studies of this issue generally suffer from a mistaken assumption that by going-private, a publicly-traded firm necessarily immunizes itself from SOX. In actuality, the need to finance a going-private transaction often requires firms to issue high-yield debt securities that subject the surviving firm to SEC-reporting obligations and, as a consequence, most of the substantive provisions of SOX. This paper thus explores a previously unexamined natural experiment: To the extent SOX contributed to the rise in going-private transactions, one should observe after 2002 a transition away from high-yield debt in the financing of going-private transactions towards other forms of "SOX-free" finance.
Using a unique dataset of going-private transactions, this paper examines the financing decisions of 468 going-private transactions occurring in the eight year period surrounding the enactment of SOX. Although SOX-free forms of subordinated debt-financing were widely available during this period, I find no significant change in the overall rate at which firms used high-yield debt-financing in structuring going-private transactions after SOX was enacted. Cross-sectional analysis, however, reveals that the use of high-yield financing marginally declined after 2002 for small- and medium-sized transactions, while significantly increasing for large-sized transactions. These findings are consistent with the hypothesis that the costs of SOX have disproportionately burdened small firms. They also strongly suggest that non-SOX factors were the primary impetus for the "name brand" buyouts commonly evoked as evidence that SOX has harmed the competitiveness of U.S. capital markets.
Number of Pages in PDF File: 54
Keywords: Sarbanes-Oxley, Securities
JEL Classification: G30, G32, G34, G38, K22
Date posted: February 4, 2008 ; Last revised: May 15, 2008