Does Investor Protection Regulation Induce Poorly Governed Firms to Go Private?

Abstract

Earlier studies show that an increase in compliance costs following investor protection reforms induces public firms to delist from stock exchanges. Using a difference-in-differences approach, I show in this paper that a decrease in the private benefits of control following investor protection reforms may also make listing less attractive for the controlling shareholders and induces them to take the firms private. Specifically, following extensive investor protection reforms at the country level in Israel, firms with inferior standards of corporate governance, pre-reform, were more likely to go private post-reform. Moreover, my results support the conjecture that by restricting controlling shareholders from using a senior executive position as a platform for tunneling, the reforms reduced their incentive to keep their firms public.

Keywords: corporate governance, investor protection, going private