I study the impact of economic uncertainty on firms’ decisions to go private. I show that firms are more likely to go private following economic uncertainty shocks, and this effect is stronger for firms with greater potential for agency conflicts: firms with dual class structure, less institutional ownership, lower asset redeployability, lower loan-to-bond ratio, and for firms in financial distress. After going private, the cost of debt decreases. To establish identification, I employ an instrumentation strategy for uncertainty using differential firms’ exposure to macro uncertainty shocks in energy, exchange rate, treasury securities and policy. These results are consistent with uncertainty exacerbating agency frictions facing public companies. To alleviate the negative impacts of uncertainty shocks, firms delist to alter their capital structures to ones that are less prone to agency frictions: ones with a small number of dominant stakeholders with aligned interests. The agency frictions are mitigated through going private, resulting in a decrease of the cost of debt.

We examine how the money creation function of banks affects the relative cost of firm financing in the bank loan vs public bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm with the same maturity and at the same time, we show that the loan-bond spread is lower for firms impacted by information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and argue that it is consistent with the “money creation” hypothesis in the theory of financial intermediation according to which banks need to keep information about their assets secret to produce private money.

This article investigates the effect of product market competition on going private decision. Using a sample of U.S. firms that went private from 1990 to 2015, I find that firms operating in concentrated industries are more likely to go private. Using tariff reductions in 1990-2005 as a quasi-natural experiment, I show that firms are less likely to go private after tariff reductions. The results are robust to different model specifications. In addition, the characteristics of the firms that went privateare significantly different from those of the firms remaining public, even at the time of IPO.

This paper studies how firms use earnouts, a contingent payment contract in mergers and acquisitions, to manage valuation risks under uncertainty. Earnouts are widely applied in mergers and acquisitions with private targets, increasing from almost 0 to more than 30% in the past twenty years. I find that the usage of earnouts positively correlates with uncertainty of the target firms. Deal completion rates increase significantly with earnouts. Acquirers experience positive cumulative abnormal returns when earnouts are used to reduce valuation risks and to incentivize target management, when there are higher misvaluation risks and moral hazard problems in the target firm. However, acquirers experience negative CAR when earnouts are improperly used. Earnouts create potential problems in the post-acquisition period. After the transaction, acquires’ objective is to maximize firm value, while targets’ objective is to maximize earnout payments. Such incentive misalignment destroys firm value.