Characteristics of companies that delisted their shares from the Tel Aviv Stock Exchange

The Bank of Israel today is publishing “Fiscal Survey and Selected Research Analyses”. The publication includes research that has not yet been published regarding the delisting of firms from the Tel Aviv Stock Exchange. The publication also includes the periodic fiscal survey, which deals with the proposed State budget for 2017 and 2018, and its ramifications on fiscal aggregates through the end of the decade, as well as three research topics that were already published in recent weeks.[1] Two of the analyses examine the Survey of Adult Skills (PIAAC) in Israel that was published at the end of June 2016: a. an estimation of the return to cognitive skills of workers in the public sector and the business sector; and b. the basic skills of workers in Israel and industry productivity. Likewise, the publication contains an analysis of the correlation between the socioeconomic status of individuals and of localities and their health status.
Following are highlights of the analysis of characteristics of companies that delisted their shares from the Tel Aviv Stock Exchange:
·         In the past 20 years, a global phenomenon can be seen, in which publicly-traded companies choose to delist their shares from stock market trading and go private. This phenomenon is also widespread in Israel, as since the beginning of 2011 about 37 percent of public companies delisted from the Tel Aviv Stock Exchange (TASE).
·         Within the framework of the analysis, we examined the characteristics of companies that chose to delist from trading on the TASE, relative to a control group of similar companies that continue to trade. In particular, we examine whether the delisting companies have a relatively more severe principal-agent problem than the control group.
·         In order to examine the severity of the company’s principal-agent problem, we used an index that we developed for assessing Israeli companies’ corporate governance quality.
·         We found that the delisted companies were characterized by a lower quality of corporate governance compared to the control group. This finding is consistent with the assessment that the principal-agent problem at those companies is more severe than that among companies in the control group.
·         We also found that delisted companies feature reduced growth opportunities, low leverage, and a low share of institutional holdings. These findings are likely in place both for companies that due to reduced growth opportunities have low access to raising funds on the capital markets, and veteran companies that do not need the market to finance their activities. In either case, these are companies that are not utilizing a major advantage of the capital market: the ability to vary the sources of financing by raising funds from the public.
·         In actuality, it appears that the delisting is efficient for those companies as it reduces the expenses involved in operating as a public company—including agent costs—without losing any significant advantage derived from their public status.
Over the course of the past 20 years, public companies worldwide can be seen to be choosing to delist from stock market trading. Between 1995 and 2005, 25 percent of public companies in Europe delisted, and between 1997 and 2014 the number of public companies in the US decreased by 50 percent. This phenomenon did not exclude Israel, where between 2011 and April 2016 the number of public companies trading on the TASE declined by about 37 percent, and the number of equity companies declined by 33 percent.
A Bank of Israel analysis examined the characteristics of 24 public companies whose controlling shareholders chose to delist them from TASE trading between 2011 and 2016, through a tender offer or through a merger with a company controlled by the controlling shareholders, compared with a control group of 48 similar companies whose shares continue to be traded. A particular focus of the examination was whether the decision to delist from trading is correlated with costs deriving from the controlling shareholders managing the company in a manner that is biased toward their personal benefit—the “principal-agent problem”. To estimate the extent of the company’s principal-agent problem, we constructed an index incorporating 27 components focused on an examination of the scope of independence of corporate governance mechanisms at the company; financial and professional expertise of those mechanisms and the gap between control and the rights to cash flows attributed to the controlling shareholders, which is accepted in the literature as a component reflecting  the controlling  shareholders’ incentive to exploit minority shareholders. We assume that the lower the company’s corporate governance grade, based on the index, the more severe its principal-agent problem.
The findings indicate that in fact companies in which the quality of corporate governance is low are more prone to delist their shares from trading. We also found that relative to the firms among the control group, the delisted companies are characterized by a lower level of leverage, fewer growth opportunities, and a lower share of institutional investor holdings. These characteristics are likely to be in place both for companies that have lower access to raising funds on the capital markets (the supply side), and companies whose need to raise funds on the market to continue their activities is lower (the demand side). We did not find that evidence of a link between the liquidity of shares and the company’s decision to delist from trading.
The findings are consistent with an interpretation that delisted companies did not want, or found it difficult, to utilize the major advantage of the capital market: the ability to vary the sources of financing by raising funds from the public. It appears that the delisting from trading is efficient for them, in reducing their expenses inherent in activity as a public company without losing any significant advantage deriving from their status as a public company.
We emphasize that the decision on the quality of corporate governance, as well as the decision on delisting from trading, is the company’s. As such, there is the possibility that the findings seen in regressions derive from reverse causality—for a company that in any case is interested in delisting from stock market trading and going private, there is no interest in investing in reducing the principal-agent problem.

[1] Two of the topics have only been published in Hebrew to date. Translations of the examination of Basic Skills of Workers in Israel and of the Social and Health Status are forthcoming.