Why Do Firms Go Dark?

49 Pages Posted: 23 Sep 2004

See all articles by Andras Marosi

Andras Marosi

University of Alberta - Department of Finance and Statistical Analysis

Nadia Massoud

Melbourne Business School, University of Melbourne

Date Written: November 2004


In recent years a number of firms have decided to "go dark", i.e. deregister with the SEC and delist from the major exchanges despite having a large number of outside shareholders. The going dark phenomenon is very different from the wave of LBOs in the 1980s. Instead of making a tender offer to outside shareholders, a growing number of firms go dark by exploiting a loophole that allows firms to deregister if they have fewer than 300 shareholders of record, where shareholders of record are typically "street names". This paper seeks to answer two important questions: (i) why do firms choose to go dark? and (ii) what are the consequences for shareholders? We find that firms with fewer valuable growth opportunities, positive cash flows, and with greater insider ownership are more likely to go dark. Furthermore, the cost of complying with the Sarbanes-Oxley Act, as reflected in audit fees, has also been a driving force behind the going dark phenomenon. We also show that investors are left holding significantly less liquid shares after firms go dark. Finally, shareholders suffer significant negative cumulative abnormal returns upon the announcement of the firms' deregistration as a public company.

Keywords: Going dark, deregistration, voluntary delisting, corporate governance, Sarbanes-Oxley Act, asymmetric information

JEL Classification: G34, G38

Suggested Citation

Marosi, Andras and Massoud, Nadia, Why Do Firms Go Dark? (November 2004). Available at SSRN: https://ssrn.com/abstract=570421 or http://dx.doi.org/10.2139/ssrn.570421

Andras Marosi

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
780-492-4279 (Phone)
780-492-3325 (Fax)

Nadia Massoud (Contact Author)

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
+61 3 9349 8130 (Phone)
+61 3 9349 8136 (Fax)

HOME PAGE: http://mbs.edu/facultyresearch/facultydirectory/Pages/NadiaMassoud.aspx

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