Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations



We examine a large sample of public companies that choose to "go dark", i.e., cease filing with the SEC by deregistering their securities, but continue to trade in the OTC market. This decision implies a substantial decrease in disclosure and investor protection. Approximately 200 companies went dark in 2003 alone, raising concerns that recent U.S. securities regulation is behind the trend. We document a large negative abnormal return at the announcement and filing of deregistration, which is more pronounced for firms that deregistered after the passage of the Sarbanes-Oxley Act. While the market's reaction does not preclude cost savings as a motivating factor for deregistrations, it suggests that shareholders infer negative information about the firm's future prospects from the going-dark decision, and/or view the decision as principally serving insiders' interests. Our analyses provide evidence that is consistent with deregistrations being triggered by negative changes in firms' prospects, but that also lends credence to concerns that deregistrations have less benign motivations when governance structures are weak and agency problems are present. While going private also leads to suspension of SEC reporting, we delineate several distinctions between firms that go dark and those that go private. For more information mail to Peter Roosenboom: proosenboom@rsm.nl