Literature review

Reasons to go public

Various external factors influence the decision of private companies to go public, with each
company having its unique considerations. Typically, companies opt for an IPO due to funding
shortages. The utilization of IPO proceeds tends to vary based on company age, with US firms,
usually younger, directing funds towards research and development to foster growth, while
European counterparts often prioritize debt reduction and leverage reduction (Kim & Weisbach,
2008; Pagano et al., 1998). According to Bancel & Mittoo (2009), European companies prioritize
improved reputation, access to investment sources, and financial resilience when go public. Larger
firms benefit from enhanced corporate governance through increased monitoring, while family-
owned businesses seek greater bargaining power with creditors. Pagano et al. (1998) suggest that
companies also consider benefits such as reduced debt or equity costs when deciding to go public.

Besides financial considerations companies may be driven by hidden motives to pursue

favorable market perceptions. Evidence suggests that discrepancies between market and
fundamental values can lead to issues, prompting companies to hold onto proceeds as cash reserves
rather than invest (Kim & Weisbach, 2008). Various theories such as signaling theory, optimal
capital structure theory, pecking order theory, and agency cost theory have been historically
recognized as significant under particular circumstances (Ragupathy, M. B., 2011; Leland & Pyle,
1977; Modigliani & Miller, 1958). There is no singular, overarching driver for public offerings;
instead, it is a combination of factors that each company must consider in relation to its short and
long-term goals.

Reasons to go private again

The primary consequence of any form of delisting is the loss of ability for a company to
secure external funding or enjoy the other advantages associated with public trading. Furthermore,
Bakke et al. (2012) contend that delisting leads to a substantial decrease in investment, cash
reserves, and employment. However, it's important to recognize that delisting does not
automatically imply bankruptcy.

Beyond default or insolvency procedures, there are various other reasons why a company
might undergo delisting, such as voluntary privatization. Pour & Lasfer (2013) suggest that
companies may opt for privatization due to challenges in raising external capital, limited growth
prospects, low or negative profitability, or a desire to reduce the costs associated with being
publicly listed. It's possible for a company to breach compliance regulations even if it doesn't
voluntarily go private. In such instances, the relevant exchange assesses the severity, scale, and
nature of the breach, as well as how it was uncovered. If the company fails to rectify the situation,
the stock exchange may impose a fine, issue a public or private reprimand, or revoke the right to
trade its securities without the company's consent, ultimately resulting in delisting (London Stock
Exchange, 2016b).

An entirely different rationale for delisting stems from mergers and acquisitions, which are
often unrelated to the particular circumstances of the firm. From a regulatory perspective, instances
where a company has a low free float of shares or its market capitalization is too small can lead to
acquisition delisting, followed by a mandatory tender offer to minority shareholders (New York
Stock Exchange, 2016). Generally, M&A activities (or delistings resulting from them) track global
economic cycles and tend to occur more frequently in countries with favorable tax regimes, high
growth potential, or cultural similarities (Xie, Reddy & Liang, 2017). These privatizations are
influenced by country-specific macroeconomic and regulatory factors or investor preferences, and
are primarily driven by the company's performance, thus falling outside the scope of this research.
In Europe, Thomsen & Vinten (2014) visually illustrate that M&As constitute a larger proportion of
delistings over time compared to reasons such as bankruptcy or voluntary privatization (1996-
2004).

Gang Hu, Ji-Chai Lin, Owen Wong, Manning Yu (2019) suggests that the main reason for
delisting is the voluntary reissuance of shares on the domestic financial market due to
improvements in government economic policies and regulatory changes. The authors empirically
justify the change in trading conditions in the Chinese stock market as the main reason for the
delisting of Chinese companies.

The role of the information environment and stock price dynamics in explaining the reasons
for delisting companies on the American stock exchange is analyzed by Kelly Cai, Heiwai Lee,
Magali Valero (2018). The study reveals the relationships between the analytical coverage of the
stock market, the stock price, and the delisting process - whether it was implemented voluntarily,
forcibly, or as part of a merger or acquisition deal.

The premium that a company is forced to pay for delisting depends on the compensation for
the complexities arising in the delisting process, the legal risks of share repurchase, the degree of
undervaluation of the issuer's shares, and the cash reserves available to the firm. It is argued that the
modern delisting of Chinese companies in the American market is primarily driven by the desire to
resell undervalued securities on more favorable terms (Yea-Mow Chen, Ying Sophie Huang, David
K. Wang, Chun-Chou Wu, 2014).
 Zhoua, Zhanga, Yangb, Suc & An (2018) examines the interconnection between procedural
delisting and the propensity of the CEO and CFO of the company to engage in fraudulent activities.
It is found, using the example of Chinese companies, that when facing the potential prospect of
delisting, company executives are more inclined to engage in fraudulent activities. The magnitude
of management incentivization depends on the delisting probability indicator.

Pour & Lasfer (2013) analyze the motives and market value of British firms that voluntarily
delist. It is argued that such companies destroy the market value of shareholder equity by failing to
capitalize on the advantages of the stock exchange.

Determinants of delisting

The age of a company is a widely studied variable and consistently found to be highly
significant (Hensler et al., 1997; Demers & Joos, 2007; Yang & Sheu, 2006; Carpentier & Suret,
2011). Researchers consistently find that firms with a longer history before listing are more likely to
survive longer. Carrol (1983) provides evidence that older firms tend to be more mature and stable,
having established their market position. Moreover, older firms typically have a longer financial
track record available, enabling investors to more accurately assess their performance.

Many studies also consider size as an important factor affecting the risk of failure, although
there are variations in how size is measured across papers. While some studies like Yang & Sheu
(2006), Jain & Kini (1999), and Ahmad & Jelic (2014) use the size of proceeds as a control variable
and find no significant relationship, others such as Hensler et al. (1997) and Chou et al. (2013) do
find a significant association. On the other hand, Abdou and Varela (2009) find a significant
relationship between survival time and the total assets of a company at the time of the IPO.
Regardless of the specific metric used to define size, all studies consistently conclude a positive
association between company size and survival time.

Additionally, Wyatt (2014) suggests that the use of proceeds from IPOs is correlated with a
firm's survivability. Companies intending to use their proceeds for acquiring other firms or
investing in capital expenditures tend to survive longer compared to others. Surprisingly, Wyatt
notes that if the initial owners use IPO proceeds to cash out of the company, the survival time
increases. Furthermore, research on secondary equity offerings by Silva and Bilinski (2015)
indicates that proceeds used for general corporate purposes and recapitalization perform worse
compared to other uses. Subsequently, Demers & Joos (2007) emphasize the importance of how
funds are utilized, suggesting that sales, general, and administrative expenses are expected to have a
negative relationship with survivability, while research and development costs are expected to have
a positive relationship.
Consequences of delisting

Besslera, Kaenb, Kurmanna & Zimmermann examines German companies that delisted
from American stock exchanges during the period 1990-2005 with the aim of increasing market
value and reducing capital costs. The results of the study revealed that a positive effect was
achieved after delisting, however, direct evidence of stock price growth and capital cost reduction
was not found. The study also provides additional reasons for delisting, including changes in
corporate governance systems and M&A transactions.

Parka, Leea & Park (2014) have identified that:

 Companies experience a decline in stock value long before delisting;

 Individual investors become net buyers of delisted securities before delisting, while
institutional and foreign investors become net sellers;
 Changes in the ownership share of major investors signal potential delisting.
References

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