Why do companies decide to voluntarily leave the stock market?

In 1996, there were approximately 8,000 public companies listed on U.S. stock exchanges. By 2016, this number had dropped to around 4,000. 

“This significant reduction is not limited to the U.S., it is observed globally among many developed nations”, says Gonul Colak, professor of finance at Hanken School of Economics. 

Colak is one of the researchers behind the article The timing of voluntary delisting that has been published in the Journal of Financial Economics. The research covers 26 countries over three decades between 1990 and 2020, and develops a theoretical model on the delisting decisions.

Fewer regulations and more flexibility

Being a public company offers several advantages, such as easy access to external financing, facilitating cheaper capital acquisition, enabling the use of stock options to attract top talent, and enhancing the firm's prestige and market visibility.

“However, being listed also has its disadvantages”, says Colak. “Private firms can make decisions much faster, making the companies more agile and able to quickly react to economic conditions.”

Another benefit is that private companies face fewer regulations and restrictions compared to public firms. The company owner might decide to go private to minimise the impact of policy uncertainties on the corporation's future.

“In general, firms from industries with the strictest regulations tend to exit the stock market”, says Colak.

He adds that regulations are a big phenomenon in the financial markets these days, rightfully so in many ways. 

“But what does delisting mean for regulatory purposes? For instance, if we want to reduce environmental pollution, do we now need to create laws that apply to both public and private companies, not just the public ones?" 

Another example of companies that tend to delist, aside from those in heavily regulated industries, are those with concentrated ownership.

“If an entrepreneur or a family has high ownership to begin with, then it becomes easier for them to collect the remaining shares and take the company private.”

Colak says that going private can also mitigate problems related to CEOs misusing corporate resources.

“When a company goes private, CEOs no longer have minority shareholders to exploit or take advantage of.”

Understanding the dynamics behind voluntary delistings

The increase in voluntary delistings signifies a major shift in the corporate landscape. According to Colak, it's essential for policymakers, investors, and the broader financial community to understand the dynamics driving this phenomenon.

"In the U.S., for example, pension funds can't invest in private equity firms. If more companies go private, economic activities might shift to private markets, limiting pension funds' investment opportunities and potentially worsening their funding. This raises questions about whether new regulations should allow pension funds to invest in private equity to capture this growth."

Colak notes that while the trend of delisting presents challenges, it's still unclear whether this shift is ultimately positive or negative.

“Maybe it's better if everything moves to private equity – we don't know yet. For the past 200 years, economies, especially in capitalist countries, have relied on public exchanges. Now, we might need a new model. However, some experts argue that there is no need to worry. Despite the decline in the number of public firms, the overall economic activity and revenue they represent haven't decreased significantly.” 

Text: Jessica Gustafsson
Photo: Adobe Stock and Jessica Gustafsson