Article

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

Robert P. Bartlett III

Assistant Professor of Law, University of Georgia School of Law

I thank Dan Brodansky, Brian Broughman, Tom Eaton, Jesse Fried, Kent Greenfield, Paul Heald, Todd Henderson, Christine Hurt, Bob Lawless, Jim Linck, Harold Mulherin, Jeff Netter, Chuck O’Kelley, Peter Oh, Victoria Plaut, Annette Poulsen, Jaxk Reeves, Larry Ribstein, Usha Rodrigues, Jim Rogers, Maggie Sachs, Jason Solomon, Eric Talley, and Jide Wintoki. This Article also benefited from comments received from participants in the Symposium The Going-private Phenomenon: Causes and Implications at The University of Chicago Law School; participants at the 2008 Annual Meeting of the American Law and Economics Association and workshop participants at the University of Georgia Department of Banking and Finance, the UC Berkeley School of Law, the Boston College School of Law, Emory Law School, the University of Illinois College of Law, the University of Pittsburgh School of Law, and the 2008 Law and Entrepreneurship Retreat. Additionally, special thanks go to Marc Auerbach of Standard & Poor’s and Eric Tutterow of Fitch Ratings for providing helpful data and discussion, and to Kevin Erwin (Georgia ’09) for research assistance. All errors are my own.

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 goingprivate, 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 goingprivate 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 debtfinancing 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.

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