A study of going-private transactions in Hong Kong

Abstract

The study aims to empirically investigate going-private transactions in Hong Kong. A total of 54 buyout proposals within the period 1986-1996 are selected to be the final sample. It is found that going-private practices in Hong Kong have unique characteristics not found in Western countries. For example, the management is always the controlling (substantial) shareholder of the target firm and the management already owns overwhelming equity interests even before the buyout. Another feature is that gone-private firms seldom choose to revert to stock market, i.e. reverse LBOs as the American counterparts usually do. Among competing hypotheses, this study provides strong support to the gains-sharing hypothesis. Positive wealth increase is observed around the announcement of the going-private proposals. All evidence suggests that minority shareholders are not subject to systematic exploitation in the course of going private. An important finding of this study is that regulation and its effect must be a factor to be taken into account in doing research. The requirement of trading suspension has a great influence on the calculation of CARs in the study. Significant difference is found between the suspension and non-suspension group. At the same time, this study finds supporting evidence for the information asymmetry hypothesis as one likely motivation behind going-private transactions in Hong Kong. The property industry is hypothesized to have a greater extent of information asymmetry on the basis of its high property to total assets ratio. It is found in the study that property companies are more prone to going-private buyouts and that the property ratio is the only significant variable, among the ones considered, in explaining the odds of going-private decisions.