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Free Cash Flow and Stockholder Gains in Going Private Transactions

Kenneth Lehn and Annette Poulsen
The Journal of Finance
Vol. 44, No. 3, Papers and Proceedings of the Forty-Eighth Annual Meeting of the American Finance Association, New York, New York, December 28-30, 1988 (Jul., 1989), pp. 771-787
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328782
Stable URL: http://www.jstor.org/stable/2328782
Page Count: 17
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Free Cash Flow and Stockholder Gains in Going Private Transactions
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Abstract

We investigate the source of stockholder gains in going private transactions. We find support for the hypothesis advanced by Jensen that a major source of these gains is the mitigation of agency problems associated with free cash flow. Using a sample of 263 going private transactions from 1980 through 1987, our results indicate a significant relationship between undistributed cash flow and a firm's decision to go private. In addition, we find that premiums paid to stockholders are significantly related to undistributed cash flow. These results are especially strong for firms that went private between 1984 and 1987 and also for firms whose managers owned relatively little equity before the going private transaction.

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