Delistings, Controlling Shareholders and Firm Performance in Europe

• Author: Ettore Croci,Alfonso Del Giudice
• Date: 01 March 2014
• Published date: 01 March 2014
• DOI: http://doi.org/10.1111/j.1468-036X.2011.00640.x

European Financial Management, Vol. 20, No. 2, 2014, 374–405

doi: 10.1111/j.1468-036X.2011.00640.x

Delistings, Controlling Shareholders

and Firm Performance in Europe

Ettore Croci and Alfonso Del Giudice

Universit`

a Cattolica del Sacro Cuore, Largo Gemelli, 1, 20123 Milan, Italy

E-mails: ettore.croci@unicatt.it; alfonso.delgiudice@unicatt.it.

Abstract

Using a novel Europeandata set, we investigate the role of controllingshareholders

in delisting decisions. Minority shareholders earn lower abnormal returns when

the controlling shareholder takes the company private, but this lower premium

disappears when we control for the firm’s characteristics. After the delisting,

firms delisted by their controlling shareholders do not improve their operating

performance. These results do not suggest that controlling shareholders expro-

priate minority investors with minority freeze-outs. Our findings are not due to

heterogeneity across controlling shareholders. In fact, when we focus on family

controlling shareholders, we find no evidence of performance improvement after

the delisting.

Keywords: delisting,freeze-out,private firm,going private

JEL Classification: G34

1. Introduction

Several publicly listed companies were delisted following going private transactions in

Europe during the years that preceded the financial crises of 2007–2009 and 2010–2011

(Renneboog et al., 2007; Thomsen and Vinten, 2007), and the number of delistings is

likely to increase in the aftermath of the financial turmoil. While private equity groups

and leveraged buyout (LBO) firms were instrumental in the growth of this phenomenon

(Lerner, 2011), companies’ managers and owners often voluntarily delist them from

stock exchanges in deals that are commonly referred to as minority freeze-outs. The

existence of large shareholders who control the listed companies is common in Europe

We thank two anonymous referees; John Doukas; Lorenzo Caprio; Kang Hyoung Goo;

Taro Niggemann; Melissa Toffanin; and participants at the 2010 FMA European Meeting

in Hamburg; the 2010 EFMA Meeting in Aarhus; the 2011 FMA European Meeting in

Porto; and the 2011 ADEIMF Meeting in Novara for their comments and suggestions. We

also thank Francesca Fariello of Bureau Van Dijk for kindly providing us some of the data

used in this study. We are grateful to the Italian Ministry of Research and Higher Education

for financial support for this project (PRIN 2008 – Research 610 Number 20082R4ZKJ).

Correspondence: Ettore Croci.

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(Faccio and Lang, 2002) and raises questions about the motivationsbehind going private

transactions.1

Controlling shareholders possess private information on a firm’s future profitability,

which gives them an advantage with respect to other investors that can be used to

take the company private at the most favourable time. Unlike the case of IPOs, where

they take their companies public after periods of superior performance and before

periods of below-average performance (Degeorge and Zeckhauser, 1993), informed

controlling shareholders should use private information to take their companies private

before good performance, when the market price of minority shares does not incorporate

this future improvement (Bebchuck and Kahan, 2000). This way, they can avoid sharing

the performance improvement with other shareholders.

Controlling shareholders are also in a strong bargaining position when they face

minority investors. The probability of being taken over by unrelated bidders decreases

when a majority ownerexists (Caprio et al ., 2011), and the presence of largeshareholders

decreases the likelihood of privateequity acquisitions (Achleitner et al., 2010). Moreover,

being already in control of the firm, controlling shareholders that want to take their

company privatedo not need to pay a premium for control. This lack of competition from

outside bidders and of a premium for control should result in lowbuyout offers to minority

investors in the going private transactions carried out by controlling shareholders.

Using a novel data set of 429 European companies that wentprivate between 1997 and

2005 but continued operating as standalone companies after the delisting, we investigate

the role of controlling shareholders and whether the delisting decision depends on

the firm’s future profitability. Since we require that the delisted company continues

operating after the deal as a standalone firm, our def inition of delisting excludes those

due to mergers or bankruptcies.2At the time of the delisting announcements, controlling

shareholders make lower offers than non-controlling bidders to take their companies

private. In fact, minority shareholders in firms with (without) a controlling shareholder

earn an average abnormal return of 16.02% (24.02%) in the 61-day event window

(−30, +30) surrounding the delisting announcement. However, this additional premium

offered by non-controlling bidders disappears when we control for the firm’s character-

istics in the multivariate analysis. Going private transactions car ried out by controlling

shareholders have less run-up than those carried out by a third party, indicating that

freeze-out deals carried out by controlling shareholders are not easily anticipated by the

market.

In the analysis of post-announcement performance, followingGuo et al . (2011), weuse

three measures of changes in operating performance: (1) changes in firm performance,

(2) industry- and country-adjusted changes in fir m performance, and (3) matching-

firm–adjusted changes in f irm performance. Overall, we find no evidence suggesting

that controlling shareholders have a positive impact on post-delisting performance once

we control for firm and market characteristics. In fact, the operating performance of f irms

1Recent evidence provided by Holderness (2009) shows that large shareholders are also

common in US firms. The author also documents that families control around 53% of the

firms in a random sample of 375 corporations listed by the Center for Research in Security

Prices and Compustat in 1995. Thus, family control is more widespread than previously

thought, even in the USA.

2Our definition of delisting excludes those due to mergers or bankruptcies because after

these events, the firm ceases to operate. We discuss this case in more detail in Section 3.1.

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delisted following offers by their controlling shareholders remains level after delisting.

These results do not support the hypothesis that the controlling shareholder exploits

private information in a going private decision to expropriate minority investors. The

lack of support for the expropriation hypothesis is consistent with the results of Faccio

and Stolin (2006), who do not find evidence that European controlling shareholders use

acquisitions to expropriate minority shareholders.

The lack of significant effects is not due to heterogeneity across the controlling

shareholders that delist their firms. Recent literature (Cronqvist and Fahlenbrach, 2009)

shows that different types of large shareholders choose different corporate policies.

To overcome this heterogeneity concern, we focus on family controlling shareholders.

Familiesare more attached to f irm control than other types of controlling shareholders, as

the persistence of family control attests (Franks et al., 2011), and they are more risk averse

(Bianco et al., 2009) and enjoy large privatebenef its of control (Barclay and Holderness,

1989). However, we still do not find evidence of a controlling shareholder effect in post-

delisting performance, even when we focus on family controlling shareholders.

Our study makes several contributions to the literature. First, we examine whether

private information on future firm performance induces insiders – that is, controlling

shareholders – to take their companies private.Second, we provide an in-depth analysisof

the role of controlling shareholders in going private transactions. Apart from Achleitner

et al. (2010), most existing studies on going private transactions neglect the role of

controlling shareholders in such transactions and assume that a public firm has diffuse

ownership, a situation rarelyencountered in Europe (La Porta et al., 1999) and, according

to Holderness (2009), not so common even in the USA.3Third, we examine the post-

transaction performance of delisted firms in Europe, adding to a growing literature

examining what happens after going private transactions (Muscarella and Vetsuypens,

1990; Jelic et al., 2005; Cressy et al., 2007; Cao and Lerner, 2009; Guo et al., 2011; Jelic

and Wright, 2011) but that usually focuses only on LBOs and management buyouts. We

examine differences between UK and Continental European delistings. As Achleitner

et al. (2010) note, the evidence on Continental Europe is still scarce compared to that

for the UK (Jelic et al., 2005; Jelic and Wright, 2011). While there are differences in the

characteristics of delisted firms, we find no evidence of a controlling shareholder effect

in either of the two subsamples.

This paper is structured as follows. Section 2 presents the literature review. Section 3

provides details of the data set and the main descriptivestatistics. Section 4 examines the

abnormal returns around going private announcements, and Section 5 studies the changes

in operating performances. Section 6 examines family controlling shareholders. Section

7 investigates the differences between UK and Continental European delistings. Section

8 presents robustness checks, including the role of insiders other than the controlling

shareholders, and an analysis of sample selection problems. Section 9 concludes the

paper.

3According to agency theory, going private transactions help mitigate the agency costs

arising in publicly listed, widely held companies (e.g., Grossman and Hart 1980; Mur phy

1985; Jensen 1986, 1993, Kaplan 1989). However, this conflict is scarcely relevant in the

typical European firm, where the largest shareholders already own a sufficient stake to give

them incentives to monitor management.

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