Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations. mimeo

Comments are welcome. We examine public companies that choose to “go dark ” , i.e., cease reporting to the SEC by deregistering their common stock, but continue to trade in the over-the-counter market. A firm can simply deregister by filing a one page form with the SEC, provided that the firm satisfies certain criteria, most notably having fewer than 300 holders of record (or 500 holders for smaller firms). In 2003 alone, over 200 companies went dark, raising concerns that recent changes to U.S. securities regulation and the associated costs are driving firms to deregister their stock. This study analyzes the rationales for, and economic consequences of, voluntary dereg-istrations from 1998 to 2003. We document a large negative abnormal return at the announcement and filing of deregistration, particularly for smaller firms, sug-gesting that cost savings alone are unlikely to be the reason for firms going dark. Consistent with the reduction in disclosure, we find a significant drop in trading volume after deregistration. We use a probit analysis to compare our going dark sample to firms that went private over this period, as well as to a control sample of firms that were eligible to go dark based on their number of holders of record, but chose to continue reporting. The evidence on firm performance, growth prospects and ownership structures is consistent with insiders opting out of SEC reporting for private control benefit reasons, as well as managers and investors reacting to the firm’s diminished future prospects