Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-12-02T21:34:01.492Z Has data issue: false hasContentIssue false
  • English
  • Français

IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists

Published online by Cambridge University Press:  01 June 2011

Onur Bayar  and
Thomas J. Chemmanur
Onur Bayar
Affiliation:
College of Business, University of Texas at San Antonio, 1 UTSA Cir., San Antonio, TX 78249. [email protected]
Thomas J. Chemmanur
Affiliation:
Carroll School of Management, 140 Commonwealth Ave., Boston College, Chestnut Hill, MA 02467. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze a private firm’s choice of exit mechanism between initial public offerings (IPOs) and acquisitions, and we provide a resolution to the “IPO valuation premium puzzle.” The private firm is run by an entrepreneur and a venture capitalist (VC) (insiders) who desire to exit partially from the firm. A crucial factor driving their exit choice is competition in the product market: While a stand-alone firm has to fend for itself after going public, an acquirer is able to provide considerable support to the firm in product market competition. A second factor is the difference in information asymmetry characterizing the two exit mechanisms. Finally, the private benefits of control accruing to the entrepreneur post-exit and the bargaining power of outside investors versus firm insiders are also different across the two mechanisms. We analyze two situations: the first, where the entrepreneur can make the exit choice alone (independent of the VC), and the second, where the entrepreneur can make the exit choice only with the concurrence of the VC. We derive a number of testable implications regarding insiders’ exit choice between IPOs and acquisitions and about the IPO valuation premium puzzle.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1755 - 1793
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F., and Faulhaber, G. R.. “Signaling by Underpricing in the IPO Market.” Journal of Financial Economics, 23 (1989), 303–323.CrossRefGoogle Scholar
Bayar, O., and Chemmanur, T. J.. “What Drives the Valuation Premium in IPOs versus Acquisitions? An Empirical Analysis.” Working Paper, Boston College and University of Texas at San Antonio (2009).Google Scholar
Boot, A. W. A.; Gopalan, R.; and Thakor, A. V.. “The Entrepreneur’s Choice between Private and Public Ownership.” Journal of Finance, 61 (2006), 803–836.CrossRefGoogle Scholar
Brau, J. C.; Francis, F.; and Kohers, N.. “The Choice of IPO versus Takeover: Empirical Evidence.” Journal of Business, 76 (2003), 583–612.CrossRefGoogle Scholar
Chemmanur, T. J. “The Pricing of Initial Public Offerings: A Dynamic Model with Information Production.” Journal of Finance, 48 (1993), 285–304.CrossRefGoogle Scholar
Chemmanur, T. J., and Fulghieri, P.. “A Theory of the Going-Public Decision.” Review of Financial Studies, 12 (1999), 249–279.CrossRefGoogle Scholar
Chemmanur, T. J., and He, J.. “IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence.” Journal of Financial Economics, 101 (2011), 382–412.CrossRefGoogle Scholar
Chemmanur, T. J.; He, J.; He, S.; and Nandy, D. K.. “The Exit Choices of Entrepreneurial Firms.” Working Paper, Boston College (2009).Google Scholar
Chemmanur, T. J.; He, S.; and Nandy, D. K.. “The Going-Public Decision and the Product Market: Empirical Evidence.” Review of Financial Studies, 23 (2010), 1855–1908.CrossRefGoogle Scholar
Chemmanur, T. J.; Paeglis, I.; and Simonyan, K.. “Management Quality and Anti-Takeover Provisions.” Journal of Law and Economics, forthcoming (2011).CrossRefGoogle Scholar
Chemmanur, T., and Yan, A.. “Product Market Advertising and New Equity Issues.” Journal of Financial Economics, 92 (2009), 40–65.CrossRefGoogle Scholar
Cho, I.-K., and Kreps, D. M.. “Signaling Games and Stable Equilibria.” Quarterly Journal of Economics, 102 (1987), 179–221.CrossRefGoogle Scholar
Cumming, D. “Contracts and Exits in Venture Capital Finance.” Review of Financial Studies, 21 (2008), 1947–1982.CrossRefGoogle Scholar
Fulghieri, P., and Sevilir, M.. “Organization and Financing of Innovation, and the Choice between Corporate and Independent Venture Capital.” Journal of Financial and Quantitative Analysis, 44 (2009a), 1291–1321.CrossRefGoogle Scholar
Fulghieri, P., and Sevilir, M.. “Size and Focus of a Venture Capitalist’s Portfolio.” Review of Financial Studies, 22 (2009b), 4643–4680.CrossRefGoogle Scholar
Hellmann, T. “IPOs, Acquisitions and the Use of Convertible Securities in Venture Capital.” Journal of Financial Economics, 81 (2006), 649–679.CrossRefGoogle Scholar
Hsu, H.-C.; Reed, A. V.; and Rocholl, J.. “The New Game in Town: Competitive Effects of IPOs.” Journal of Finance, 65 (2010), 495–528.CrossRefGoogle Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetries, Financial Structure, and Financial Intermediation.” Journal of Finance, 32 (1977), 371–387.CrossRefGoogle Scholar
Maksimovic, V., and Pichler, P.. “Technological Innovation and Initial Public Offerings.” Review of Financial Studies, 14 (2001), 459–494.CrossRefGoogle Scholar
Nahata, R. “The Determinants of Venture Capital Exits: An Empirical Analysis of Venture Backed Companies.” Working Paper, Vanderbilt University (2003).Google Scholar
Pagano, M.; Panetta, F.; and Zingales, L.. “Why Do Companies Go Public? An Empirical Analysis.” Journal of Finance, 53 (1998), 27–64.CrossRefGoogle Scholar
Poulsen, A. B., and Stegemoller, M.. “Moving from Private to Public Ownership: Selling Out to Public Firms versus Initial Public Offerings.” Financial Management, 37 (2008), 81–101.CrossRefGoogle Scholar
Purnanandam, A. K., and Swaminathan, B.. “Are IPOs Really Underpriced?” Review of Financial Studies, 17 (2004), 811–848.CrossRefGoogle Scholar
Rajan, R. G., and Wulf, J.. “Are Perks Purely Managerial Excess?” Journal of Financial Economics, 79 (2006), 1–33.CrossRefGoogle Scholar
Ritter, J. R., and Welch, I.. “A Review of IPO Activity, Pricing, and Allocations.” Journal of Finance, 57 (2002), 1795–1828.CrossRefGoogle Scholar
Sigg, K. “Cerent Corporation.” Case Study E-83, Graduate School of Business, Stanford University (2000).Google Scholar
Spiegel, M., and Tookes, H.. “Dynamic Competition, Innovation and Strategic Financing.” Working Paper, Yale University (2007).CrossRefGoogle Scholar
Stoughton, N. M.; Wong, K. P.; and Zechner, J., “IPOs and Product Quality.” Journal of Business, 74 (2001), 375–408.CrossRefGoogle Scholar
Welch, I. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (1989), 421–449.CrossRefGoogle Scholar