Going Private Buyouts and Shareholder Wealth Gains: Impact of Bankruptcy Risk

42 Pages Posted: 6 Mar 2007

See all articles by Mike Wright

Mike Wright

Nottingham University Business School

Puliyur Sudarsanam

Cranfield University - School of Management

Jian Huang

RiskMetrics Group, Inc.

Date Written: March 2007


Using a sample of 236 UK companies that went from public to private (PTP) company status during 1997 to 2005 and a control sample of similar firms not going private, we study, with logistic regression methodology, the impact of bankruptcy risk measured by their default probability, estimated using stock market data and option pricing models, on the going private decision. We also examine value gains to existing shareholders of target companies of PTP transactions. Fama-French 3 factor event study approach is used to estimate the abnormal returns around the announcement period. We find that going private companies have significantly higher default probability. They also have fewer growth opportunities, lower stock market valuation, poorer operating performance and larger pre-PTP management holding. These companies are usually small in size, suffer stock market neglect and are undervalued. Weak corporate governance factors increase the chances of going private. We report a cumulative abnormal return (CAR) of 15% for a 7 day announcement period for firms subject to going private. These returns are higher for target firms faced with higher bankruptcy risk suggesting a strong turnaround motivation for the PTP deal. Private equity firms sponsoring PTPs generate higher shareholder value gains when they acquire firms with poorer growth record, higher risk of bankruptcy and larger free cash flow suggesting they are not deterred by the risk of financial distress but consider it a value creating opportunity. High bankruptcy risk at going private increases the chance the target will end up in receivership.

Keywords: going private; financial distress

JEL Classification: G32; G34

Suggested Citation

Wright, Mike and Sudarsanam, Puliyur Sudi and Huang, Jian, Going Private Buyouts and Shareholder Wealth Gains: Impact of Bankruptcy Risk (March 2007). Available at SSRN: https://ssrn.com/abstract=967731 or http://dx.doi.org/10.2139/ssrn.967731

Mike Wright (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5257 (Phone)
+44 115 951 5204 (Fax)

Puliyur Sudi Sudarsanam

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Jian Huang

RiskMetrics Group, Inc.

1 Commodity Quay
East Smithfield
London, E1W 1AZ
United Kingdom
+44 20 7063.5636 (Phone)
+44 20 7063.5601 (Fax)

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