Why Do Firms Go Dark?
49 Pages Posted: 23 Sep 2004
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: Suggested Citation