November 7, 2009
IPOs versus Acquisitions: An Empirical Analysis
Abstract: Using a hand-collected data set of private firm acquisitions and IPOs, this paper presents an empirical analysis of a private firm's choice between IPOs and acquisitions, and develops the first empirical analysis in the literature of the “IPO valuation premium puzzle” (where many private firms seem to choose to be acquired rather than to go public at higher valuations). In the first part of the paper, we test several new hypotheses regarding a firm's choice between IPOs and acquisitions and develop several new empirical findings. First, firms operating in less concentrated industries characterized by the absence of a dominant market player (and therefore more viable against product market competition) are more likely to go public rather than be acquired. Second, firms facing a greater extent of information asymmetry in the equity market, more capital intensive firms, and those operating in industries characterized by greater private benefits of control, are more likely to go public rather than to be acquired. Third, the likelihood of an IPO over an acquisition is greater for venture backed firms and those characterized by higher pre-exit sales growth. Finally, we document that the passage of the Sarbanes-Oxley Act has motivated a larger proportion of firms to favor acquisitions over IPOs. Our comparison of private firm valuations in IPOs and acquisitions in the second part of the paper indicates that IPO valuation premia disappear for larger firms after controlling for various factors affecting a firm's choice between IPOs and acquisitions. Further, after controlling for the long run component of the expected payoff to firm insiders from an IPO exit, we find that the IPO valuation premium vanishes even for smaller venture backed firms and shrinks substantially for non-venture backed firms as well. Thus, we are able to resolve the IPO valuation premium puzzle for the first time in the literature.
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