Skip to main content Accessibility help
×
Home
Hostname: page-component-544b6db54f-rcd7l Total loading time: 0.19 Render date: 2021-10-20T11:47:25.274Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

Product Market Characteristics and the Choice between IPOs and Acquisitions

Published online by Cambridge University Press:  27 March 2018

Abstract

Using unique U.S. Census data sets, we analyze how entrepreneurial firms’ product market characteristics affect their choice between going public, being acquired, or remaining private. Size, total factor productivity (TFP), sales growth, capital expenditure, market share, access to private funding, and human capital intensiveness significantly increase a private firm’s likelihood of an initial public offering (IPO) relative to an acquisition. Firms in industries with less information asymmetry and higher stock liquidity are more likely to choose an IPO over an acquisition. While TFP peaks around either form of exit, the rate of increase in TFP prior to acquisitions and the subsequent decrease is smaller than that around IPOs.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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.)

Footnotes

1

An earlier version of the paper was circulated under the title “The Exit Choices of Entrepreneurial Firms.” For helpful comments or discussions, we thank an anonymous referee, Melissa Ruby Banzhaf, Onur Bayar, Lauren Cohen, Jim Davis, Bill Francis, Julie Hotchkiss, Karthik Krishnan, Paul Malatesta (the editor), Marc Martos-Vila, Jeff Netter, Jay Ritter, Rene Stulz, Xuan Tian, Sheridan Titman, and Chad Zutter. We also thank conference participants at the 2015 Financial Intermediation Research Society Conference, the 2014 Conference on Entrepreneurship and Finance at HKUST, the 2012 American Finance Association Meetings, the 2012 Atlanta Research Data Center Conference, the 2011 Duke/Kauffman Entrepreneurship Conference, and the 2010 Financial Management Association Meetings, and seminar participants at Boston College, Louisiana State University, and the University of Georgia for helpful comments. Chemmanur acknowledges summer support from Boston College and additional financial support from a Hillenbrand Distinguished Fellowship. The research presented in this paper was conducted while the authors were special sworn status researchers at the Boston Research Data Center of the U.S. Census Bureau. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. Any errors and omissions are the responsibility of the authors.

References

Aggarwal, V. A., and Hsu, D. H.. “Entrepreneurial Exits and Innovation.” Management Science, 60 (2014), 867887.CrossRefGoogle Scholar
Aron, D.Using the Capital Market as a Monitor: Corporate Spin-Offs in an Agency Framework.” Rand Journal of Economics, 22 (1991), 505518.CrossRefGoogle Scholar
Aslan, H., and Kumar, P.. “Valuation Risk, Control and the Public Financing of Entrepreneurial Firms.” Working Paper, University of Houston (2011).Google Scholar
Ball, E.; Chiu, H. H.; and Smith, R.. “Can VCs Time the Market? An Analysis of Exit Choice for Venture-Backed Firms.” Review of Financial Studies, 24 (2011), 31053138.CrossRefGoogle Scholar
Bayar, O., and Chemmanur, T. J.. “IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists.” Journal of Financial and Quantitative Analysis, 46 (2011), 17551793.CrossRefGoogle Scholar
Bayar, O., and Chemmanur, T. J.. “What Drives the Valuation Premium in IPOs versus Acquisitions? An Empirical Analysis.” Journal of Corporate Finance, 18 (2012), 451475.CrossRefGoogle Scholar
Bayar, O.; Chemmanur, T. J.; and Liu, M. H.. “A Theory of Equity Carve-Outs and Negative Stub Values under Heterogeneous Beliefs.” Journal of Financial Economics, 100 (2011), 616638.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 10431075.CrossRefGoogle Scholar
Bhattacharya, S., and Ritter, J. R.. “Innovation and Communication: Signalling with Partial Disclosure.” Review of Economic Studies, 50 (1983), 331346.CrossRefGoogle Scholar
Brau, J. C.; Francis, B.; and Kohers, N.. “The Choice of IPO versus Takeover: Empirical Evidence.” Journal of Business, 76 (2003), 583612.CrossRefGoogle Scholar
Chemmanur, T. J., and Fulghieri, P.. “A Theory of the Going-Public Decision.” Review of Financial Studies, 12 (1999), 249279.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), 382412.CrossRefGoogle Scholar
Chemmanur, T. J.; He, S.; and Nandy, D. K.. “The Going-Public Decision and the Product Market.” Review of Financial Studies, 23 (2010), 18551908.CrossRefGoogle Scholar
Chemmanur, T. J.; Krishnan, K.; and Nandy, D. K.. “How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface.” Review of Financial Studies, 24 (2011), 40374090.CrossRefGoogle Scholar
Chod, J., and Lyandres, E.. “Strategic IPOs and Product Market Competition.” Journal of Financial Economics, 100 (2011), 4567.CrossRefGoogle Scholar
Clementi, G. L.“IPOs and the Growth of Firms.” Working Paper, New York University (2002).Google Scholar
Clementi, G. L., and Hopenhayn, H. A.. “A Theory of Financing Constraints and Firm Dynamics.” Quarterly Journal of Economics, 121 (2006), 229265.Google Scholar
Cumming, D.Contracts and Exits in Venture Capital Finance.” Review of Financial Studies, 21 (2008), 19481982.CrossRefGoogle Scholar
Dasgupta, S., and Titman, S.. “Pricing Strategy and Financial Policy.” Review of Financial Studies, 11 (1998), 705737.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 (2009), 12911321.CrossRefGoogle Scholar
Gao, X.; Ritter, J. R.; and Zhu, Z.. “Where Have All the IPOs Gone?Journal of Financial and Quantitative Analysis, 48 (2013), 16631692.CrossRefGoogle Scholar
He, S., and Li, C. W.. “Human Capital, Management Quality, and the Exit Decisions of Entrepreneurial Firms.” Journal of Financial and Quantitative Analysis, 51 (2016), 12691295.CrossRefGoogle Scholar
Heckman, J.Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153161.CrossRefGoogle Scholar
Jarmin, R. S., and Miranda, J.. “The Longitudinal Business Database.” Working Paper, Center for Economic Studies (2002).Google Scholar
Kyle, A. S.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.CrossRefGoogle Scholar
Lemmon, M., and Roberts, M. R.. “The Response of Corporate Financing and Investment to Changes in the Supply of Credit.” Journal of Financial and Quantitative Analysis, 45 (2010), 555587.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed over Time?Financial Management, 33 (2004), 537.Google Scholar
Lyandres, E.Capital Structure and Interaction among Firms in Output Markets: Theory and Evidence.” Journal of Business, 79 (2006), 23812421.CrossRefGoogle Scholar
Maksimovic, V., and Pichler, P.. “Technological Innovation and Initial Public Offerings.” Review of Financial Studies, 14 (2001), 459494.CrossRefGoogle Scholar
McGuckin, R. H., and Pascoe, G.. “The Longitudinal Research Database: Stats and Research Possibilities.” Survey of Current Business, 68 (1988), 3037.Google Scholar
Petersen, M. A.Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435480.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), 81101.CrossRefGoogle Scholar
Puri, M., and Zarutskie, R.. “On the Life Cycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms.” Journal of Finance, 67 (2012), 22472293.CrossRefGoogle Scholar
Schoar, A.Effects of Corporate Diversification on Productivity.” Journal of Finance, 57 (2002), 23792403.CrossRefGoogle Scholar
Spiegel, M., and Tookes, H.. “Dynamic Competition, Innovation and Strategic Financing.” Working Paper, Yale University (2007).Google Scholar
Stein, J. C.Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655669.CrossRefGoogle Scholar
Stein, J. C.Internal Capital Markets and the Competition for Corporate Resources.” Journal of Finance, 52 (1997), 111133.CrossRefGoogle Scholar
Supplementary material: File

Chemmanur et al. supplementary material

Chemmanur et al. supplementary material 1

Download Chemmanur et al. supplementary material(File)
File 149 KB
18
Cited by

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Product Market Characteristics and the Choice between IPOs and Acquisitions
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Product Market Characteristics and the Choice between IPOs and Acquisitions
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Product Market Characteristics and the Choice between IPOs and Acquisitions
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *