Do IPOs’ Characteristics Affect the Likelihood of Post-Offering Acquisitions of Entrepreneurial Firms?

The strategy and financial economics literature have long investigated the problem of adverse selection between buyers and sellers in M&A markets, which can create inefficiencies and stop acquirers from gaining access to valuable resources and capabilities via acquisitions. In turn, the entrepreneurship literature has highlighted the challenges faced by entrepreneurial firms to raise external capital, due to the asymmetric information that separates them from prospective exchange partners. In this paper, we study initial public offerings and their characteristics as vehicles to bring these parties together in M&A. Precisely, we investigate several micro features of IPOs that provide signals mitigating the problems stemming from information asymmetry across entrepreneurial firms and acquirers. We construct hazard models that bring strong evidence that certain IPO characteristics can influence the likelihood of entrepreneurial firms attracting M&A suitors. 3 INTRODUCTION Despite being so commonplace, mergers and acquisitions have often failed to create value for acquiring firms (e.g., Kaplan & Weisbach, 1992). Amongst the several causes that have been associated with M&A's poor track record, the problem of adverse selection has received a great deal of attention in the literature: Due to the asymmetric information that exists between buyers and sellers, acquirers cannot tell apart high and low quality target firms, and in turn target firms cannot credibly convey their true value to acquirers (e. The upshot of this conundrum is that oftentimes buyers overpay for the resources they seek, or that otherwise promising deals do not follow through because of the inability to reach agreeable terms by the parties engaged in the negotiation. We suspect that the challenges of adverse selection in acquisitions will become even more prevalent when the seller is an entrepreneurial venture, for a number of reasons. First, the value of these firms is often attached to intangibles and perceived growth opportunities, rather than assets in place and established business clearly raises the challenges of valuation borne by acquirers. Second, as the value of the entrepreneurial firm is tied greatly to the figure of the entrepreneur, acquirers will also have to discount their valuation to account for the incentives that entrepreneurs may have to pursue private gains, after resources have been extended to them (e. In turn, these considerations can further exacerbate the information problem borne by acquirers, because bidders cannot rely upon 4 strong signals from the institutional context and the target's stakeholders to evaluate the firm's prospects effectively (e.g. Arrow, 1974). …