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Free Cash Flow and Stockholder Gains in Going Private Transactions
Author(s) -
LEHN KENNETH,
POULSEN ANNETTE
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb04390.x
Subject(s) - shareholder , cash flow , free cash flow , database transaction , monetary economics , business , private equity , equity (law) , sample (material) , cash , operating cash flow , finance , economics , corporate governance , law , chemistry , chromatography , computer science , political science , programming language
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.