Free Cash Flow and Stockholder Gains in Going Private Transactions




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    • Office of Economic Analysis, Securities and Exchange Commission and Department of Banking and Finance, University of Georgia, respectively. We thank Nick Dopuch, Larry Harris, Mark Mitchell, Jeffry Netter, Jay Ritter, Michael Ryngaert, William Schwert, and Charles Trczinka for many helpful comments and suggestions. In addition, we are indebted to Mary Dehner for editorial assistance. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or of Kenneth Lehn's colleagues on the staff of the Commission.


We investigate the source of stockholder gains in going private transactions. We find support for the hypothesis advanced by Jensen that a major source of these gains is the mitigation of agency problems associated with free cash flow. Using a sample of 263 going private transactions from 1980 through 1987, our results indicate a significant relationship between undistributed cash flow and a firm's decision to go private. In addition, we find that premiums paid to stockholders are significantly related to undistributed cash flow. These results are especially strong for firms that went private between 1984 and 1987 and also for firms whose managers owned relatively little equity before the going private transaction.