Corporate Investment Decisions and Corporate Control: Evidence from Going-Private Transactions

Abstract

The investment decisions of firms over a five-year period immediately prior to being taken private are examined. The results indicate that announcements of new investments made by going-private candidates are characterized by significant negative median abnormal returns. These findings appear to be driven largely by the subsample of contested transactions. For this subsample and its control group, the likelihood of becoming a buyout candidate is significantly inversely related to the wealth effects of the firm's investment decisions. Overall, the results suggest that one source of value in going-private transactions, particularly contested transactions, is the reduction of agency costs observed in the form of poor investment decisions.