Speaking at a Yale finance and accounting seminar later today, Amy Dittmar from the University of Michigan asks a very pertinent question: Why do firms use private equity to opt out of public markets? (PDF).
Written with co-author Sreedhar T. Bharath, their paper employs a comprehensive sample of going private transactions from 1980-2004 in the US. Their model does a remarkably good job of predicting which public firms will go private:
Using only data at the time of the IPO, we are able to correctly predict who will go private 80.6% of the time. This result implies that it is not only the path that the firm takes but factors inherent and observable about the firm at the time of going public that determines if it eventually will go private.
And what is driving those decisions? They accord well with theory:
Our results provide strong support for the importance of information and liquidity considerations in being a public firm. Access to capital and control considerations become increasingly important over the public life of the firm. We also find that the information and liquidity factors that drive the firms to go private are evident at the initial public offering, on average thirteen years before the going private decision.
A nice piece of research.