Tunneling and the decision to go private: Evidence from Hong Kong

We examine a sample of going-private transactions in the Hong Kong stock market from 1989 to 2008. Privatized firms experienced large negative abnormal returns prior to the announcement of going private transaction, particularly in those firms with weak corporate governance structure and a high level of related party transactions. The likelihood of a firm to go private is high in those poorly governed firms with large free cash flow. Our evidence suggests that controlling shareholders carry out self-dealings that lead to value losses and depressed stock prices. When remaining public is no longer attractive, controlling shareholders take the firm private by paying a relatively low premium to minority shareholders.

► We highlight a reason for the decision to go private outside the US stock market. ► Going private may serve as a tool to expropriate the minority shareholders. ► Controlling shareholders tunnel resources through related party transactions. ► This tunneling activity leads to firm value losses and depressed stock prices. ► If remaining public is no longer attractive, they take the firm private.