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Private matters

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  • Helwege, Jean
  • Packer, Frank
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    Abstract

    Why do private firms stay private? Empirical evidence on this issue is sparse, as most private firms in the U.S. do not report their financial results. We investigate why private status matters by taking advantage of a unique dataset of large, leveraged private firms with SEC filings. Unlike a number of other studies, we find that neither the existence of growth opportunities, nor the desire of firm founders to diversify, is a principal determinant of the decision whether or not to retain private status. Rather, the existence of private benefits of control appears to serve as the most significant incentive to stay private. Family-controlled firms have significantly lower probabilities of filing for an IPO, while a board structure that grants management relatively more autonomy lowers the probability of an IPO filing as well. Cross-sectional analysis of profitability and ex post performance suggests that while private benefits of control may encourage firms to stay private, they do not have detrimental effects on firm efficiency. In contrast, firms controlled by private equity specialists appear to place a low value on control benefits and are likely to go public as a means of cashing out.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Intermediation.

    Volume (Year): 18 (2009)
    Issue (Month): 3 (July)
    Pages: 362-383

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    Handle: RePEc:eee:jfinin:v:18:y:2009:i:3:p:362-383

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    Web page: http://www.elsevier.com/locate/inca/622875

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    Keywords: Private firms Initial public offering Private benefits of control Family firms Inside ownership Board composition Private equity Venture capital;

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    Cited by:
    1. Anderson, Ronald C. & Duru, Augustine & Reeb, David M., 2012. "Investment policy in family controlled firms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1744-1758.
    2. Flor, Christian Riis & Grell, Kevin Berg, 2013. "Venture capital budgeting — Carry and correlation," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 216-234.
    3. Henrik CRONQVIST & Rüdiger FAHLENBRACH, . "CEO Contract Design: How Do Strong Principals Do It?," Swiss Finance Institute Research Paper Series 11-14, Swiss Finance Institute.
    4. Anna Kovner & Chenyang Wei, 2012. "The private premium in public bonds," Working Papers 12-7, Federal Reserve Bank of Philadelphia.
    5. Asker, John & Farre-Mensa, Joan & Ljungqvist, Alexander P., 2010. "Does the Stock Market Harm Investment Incentives?," CEPR Discussion Papers 7857, C.E.P.R. Discussion Papers.
    6. González, Maximiliano & Guzmán, Alexander & Pombo, Carlos & Trujillo, María-Andrea, 2013. "Family firms and debt: Risk aversion versus risk of losing control," Journal of Business Research, Elsevier, vol. 66(11), pages 2308-2320.

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