Going Private but Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms' Going-private Decisions

This Article examines whether the cost of complying with the Sarbanes-Oxley Act of 2002 (SOX) contributed to the rise in going-private transactions after its enactment. Prior studies of this issue generally suffer from a mistaken assumption that by going private, a publicly traded firm necessarily immunizes itself from SOX. In actuality, the need to finance a going-private transaction often requires firms to issue high-yield debt securities that subject the surviving firm to SEC reporting obligations and, as a consequence, most of the substantive provisions of SOX. This Article thus explores a previously unexamined natural experiment. to the extent SOX contributed to the rise in going private transactions, one should observe after 2002 a transition away from high-yield debt in the financing of going-private transactions towards other forms of "SOX-free" finance. Using a unique dataset of going-private transactions, this Article examines the financing decisions of 468 going-private transactions occurring in the eight-year period surrounding the enactment of SOX. Although SOX-free forms of subordinated debt-financing were widely available during this period, I find no significant change in the overall rate at which firms used high-yield debt financing in structuring going-private transactions after SOX was enacted. Cross-sectional analysis, however, reveals that the use of high-yield financing marginally declined after 2002 for small- and medium-sized transactions, while significantly increasing for large-sized transactions. These findings are consistent with the hypothesis that the costs of SOX have disproportionately burdened small firms. They also strongly suggest that non-SOX factors were the primary impetus for the "name brand" buyouts commonly evoked as evidence that SOX has harmed the competitiveness of US capital markets.