Financial Distress Costs, Incentive Realignment, Private Equity and the Decision to Go Private: Public to Private Activity in the UK

Abstract

This paper investigates how far UK public to private transactions can be explained by financial distress costs or incentive realignment. We find that firms going private are more likely to be smaller, more diversified, younger and have lower Q ratios than firms remaining public. The results therefore offer limited support for both theories. We also find that private equity providers are more likely to be involved in the process if the firm going private is more diversified and has a higher Q ratio. This suggests that private equity providers are more interested in growth prospects than potential financial distress costs.

Keywords: MBOS, LBOS, private equity, takeovers, financial distress costs, financial incentives, firm age, free cashflow, diversification

JEL Classification: G32, G34, G35, M21, L21