Staying Private - Explained
Why does a Company remain private rather than going public?
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Table of ContentsWhat is Staying Private?Why Would a Company Stay Private?Academic Research on Staying Private
What is Staying Private?
Raising public capital is necessary for many companies. Many sectors have accessed the public market for it to sponsor their daily operations and grow their businesses. By selling stock or portion of ownership in a public offering, companies which go public get an instant influx of capital. While some companies may be comfortable with it, other companies understand the fact that public ownership does not come easy, meaning that it comes at a price. By choosing or deciding to remain private, they wont have to answer to a large group of shareholders. In addition, they will be able to keep their finances, as well as, business plans private.
Why Would a Company Stay Private?
Private company founders generally have increased autonomy, such as:
- control over the pay of senior executives,
- determine who can invest in the company,
- select the technique and direction.
On the other hand private companies may have the following issues:
- attracting top talent (because of the higher pay and stock options public companies can provide)
- Limited liquidity for shareholders.
While going public implies the potential for generating enormous cash, it may also lead to increased scrutiny from shareholders and regulators (such as the Securities and Exchange Commission). It is mandatory for a public traded company to give up some control so as to have access to a huge sum of capital it may not have had access to when it operated as a private company. Companies do not have to go public to raise capital. There are tons of compelling reasons why companies choose to go public. Having access to huge amounts of capital is one of the major reasons. However, the disadvantage associated with the increased capital includes increased scrutiny by shareholders and the SEC. This drawback can outweigh the benefits. It is important to know that private companies can remain free while turning to other sources of capital. Both stock and traditional lending institutions are efficient ways of raising enough capital that is needed. It is good to be aware of the fact that going public is not the right decision at all times.
Academic Research on Staying Private
- Why private companies stay private: the FEI research foundation asked senior financial executives of five privately held companies to tell why they stay private. Here's , Sinnett, W. M. (2002). Financial Executive, 18(7), 51-54. This article investigates why private companies decide to remain private instead of going public. The reasons for this were gotten from senior financial executives who were interviewed.
- The flotation of companies on the stock market: A coordination failure model, Pagano, M. (1993). European Economic Review, 37(5), 1101-1125. This research paper explicates the stock market with an emphasis on companies flotation. In certain countries, the stock market size, as well as, the number of public companies have continuously slowed down economic growth. Trading externalities can be effective in explaining this fact. By the time an entrepreneur goes public, he/she increases others risk-sharing opportunities. This externality can result in an inefficient low number of public companies, as well as, create multiple balance when flotation decisions positively correlate across entrepreneurs. This occurs if these encounter borrowing constraints and also lack liquidity, and thus can only diversify their portfolios by going public.
- Initial public offerings: An analysis of theory and practice, Brau, J. C., & Fawcett, S. E. (2006). The Journal of Finance, 61(1), 399-436. This paper analyzes the theory, as well as, practice. 336 chief financial officers (CFOs) are surveyed in order to compare the practice to theory in certain areas such as timing, underpricing, underwriter selection, initial public offering (IPO), and the decision to stay private. It is discovered that the major motivation behind going public is to enhance acquisitions. Chief financial officers base IPO timing on general market conditions, they are well informed about expected underpricing, and also feel that underpricing rewards investors for the risks they take. Previous historical earnings, as well as underwriter certification, are the most important positive signals. It is discovered that the major reason for staying private is to maintain the control and ownership of the decision-making process.
- Market liquidity, investor participation, and managerial autonomy: why do firms go private?, Boot, A. W., Gopalan, R., & Thakor, A. V. (2008). The Journal of Finance, 63(4), 2013-2059. This research paper analyzes investor participation, market liquidity, and managerial autonomy. It also answers the reason why firms decide to go private. In a bid to analyze the decision of the firm to go private or remain public, public-market investor participation is focused on. Public ownership liquidity is a blessing and also a curse in the sense that it reduces the cost of capital but it also introduces volatility in the shareholder base of a firm. This exposes management to uncertainty concerning the intervention of shareholders in management decisions, hence curtailing managerial inputs and also affecting the managers perceived independence in making decisions.
- Why do companies stay private? Determinants for IPO candidates to consider in Poland and the Czech Republic, Meluzn, T., Zinecker, M., Balcerzak, A. P., & Pietrzak, M. B. (2018). Eastern European Economics, 56(6), 471-503. This works attempts to answer the question about why companies decide to remain private. 65 chief financial officers (CFOs) at nonfinancial and nonpublic companies were surveyed. These CFOs are in Poland and Czech Republic companies which are termed candidates for an IPO to document their propensity of refusing to launch initial private ownership and maintain private ownership. First, it was discovered that the major arguments against launching an IPO in the two countries involve disclosing information and limiting the control of decision making. Surprisingly, most managers dont see the capital market as a more flexible or cheaper financing source as against bank loans and other sources.
- Go public or stay private: A theory of entrepreneurial choice, Boot, A., Thakor, A., & Gopalan, R. (2004). This article is based on the major decision of either going public or staying private. This is seen as a theory of entrepreneurial choice. An analysis is made on an entrepreneurs choice between private or public ownership. The manager requires decision-making autonomy in order to fully manage the firm thereby trading off an endogenized control choice instead of the higher capital cost alongside greater managerial independence. Investors require liquid ownership stakes. Liquidity is provided by public capital markets but they state corporate governance which forces generic exogenous controls, in order for the manager not to get the desired trade-off between capital cost and autonomy. Private ownership, on the other hand, provides the needed trade-off by means of precisely calibrated contracting, but illiquid ownership is created.
- The private company discount, Koeplin, J., Sarin, A., & Shapiro, A. C. (2000). Journal of Applied Corporate Finance, 12(4), 94-101. This research work seeks to explain the private company discount. A discount is applied when investment bankers or appraisers hold a private company in high esteem by reference to a similar but public company. Majority of practitioners are of the opinion that thus discount shows the lowered value as a result of the private companies relative illiquidity. The strategy used to calculate the private company discount is flawed because of two major reasons. The first is that the private placement discount can be associated with a number of factors, of which one of them is illiquidity. The second is that the private companies may be seen differently because of other factors excluding liquidity which have made the firm to continue being private instead of deciding to list on an exchange.
- Stay public or go private?: A comparative analysis of water services between Quito and Guayaquil, Carrillo, P. E., Bellettini, O., & Coombs, E. (2007). This research work is based on the major decision of either going public or staying private. It engages in a comparative analysis of water services between the largest cities in Ecuador, namely Quito and Guayaquil. Certain indicators of water coverage, price, and quality are computed in Ecuadors two largest cities. This computation was done before and also after the water services in Guayaquil became privatized. The type of data sources utilized enable the specific control for income. Hence, enabling evaluation of changes in the provision of water, with respect to the poor. They also provide useful details about how there has been a change in specific water-related services over time. Also, the indicator helps to evaluate the performance of each company.
- The eclipse of private equity, Cheffins, B., & Armour, J. (2008). Del. J. Corp. L., 33, 1. This paper explains the eclipse of private equity. Private equity is characterized by firms that operate as privately held partnerships which organize the acquisition, as well as, taking private of public companies. Private equity has, of recent, dominated the business news as a result of deals unprecedented in size and also number. The article argues that things will be different from Michael Jensens 1989 prediction in The Eclipse of the Public Corporation. One of the possibilities is that a set of legal and market conditions highly congenial to transactions which are public-to-private can be disrupted.
- Factors Influencing Companies to Stay Private: A Case Study from Maldives, Safna, H. (2014). This paper centers on the factors that influence companies to remain private.
- Ownership and performance in competitive environments: A comparison of the performance of private, mixed, and state-owned enterprises, Boardman, A. E., & Vining, A. R. (1989). the Journal of Law and Economics, 32(1), 1-33. This work is based on ownership, as well as, performance in competitive environments. It compares how private, mixed, and also state-owned enterprises perform.