The Choice of Ipo versus Takeover: Private Investors and Empirical Evidence*

We study the effect of private investor contractual governance on the likelihood of an entrepreneurial firm going public versus being acquired. On one hand, we may expect that the use of strong investor control contracts improves entrepreneurial firm governance and increases the probability of going public. On the other hand, we may expect that founding entrepreneurs generally prefer to maintain their position as CEO, and that the use of strong investor control contracts, which enables actual or constructive replacement of the founding entrepreneur as CEO, increases the probability of a takeover. These competing propositions are tested with a new sample of detailed European IPO and takeover transactions. The empirics indicate takeovers are more likely with strong private investor control contracts. Consistent with recent developments in the literature on capital structure and signaling, that data also indicate IPOs are more likely with private investor common equity contracts.