Does investment improve when firms go private?

Purpose - This paper aims to examine whether investment efficiency improves after publicly-traded firms are taken private. Design/methodology/approach - The analysis uses univariate comparisons and regression analysis of panel data. Findings - Before going private, firms' investment ratios and investment opportunities are similar to investment ratios and investment opportunities of peer firms. However, after going private, the investment ratios significantly decrease to levels significantly below the investment ratios of peer firms. Additionally, investment becomes less sensitive to investment opportunities and more sensitive to operating profits and cash holdings. Finally, cash becomes more sensitive to cash-flow after going private. These results suggest that firms become more financially constrained, under-invest relative to their industry peers, and invest less efficiently after going private. Originality/value - Improvements in investment efficiency are often cited as a contributing factor to the value gains associated with going-private transactions. However, whether investment efficiency improves when firms go private remains unanswered by prior research. In theory, investment efficiency should improve if private firms are shielded from the market pressure for short-term earnings and better able to invest for long-term value creation. Conversely, it is possible that the high levels of debt associated with these transactions impose financial constraints that reduce investment efficiency. The results of this study suggest that investment efficiency does not improve after going private.