#04-19
Why do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
Christian Leuz, Alexander Triantis and Tracy Wang
Abstract: 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 delineae several distinctions between firms that go dark and
those that go private.
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