Market Timing and Exit Choices: IPO v. Acquisition

Abstract:     
Our results shed new light on interpretations of statistical evidence of market timing in prior research on IPO timing and exit choice. We examine IPO and acquisition waves and exit choices for 7082 venture-backed private companies over the 29-year period from 1978 through 2006. Consistent with other literature, we hypothesize that levels of IPO and acquisition activity and the choice between IPO and acquisition may be affected by market timing or by pseudo market timing that reflects variations in (i) information asymmetry, (ii) capital demand, and (iii) the relative cost of the alternatives. Based on any of several testing criteria and using either the full sample, or sector-specific subsamples, we find evidence of pseudo market timing. IPOs are selected during periods when market-wide demand for growth capital is high, adverse selection costs are low, the value of protecting private information is low, and market values have been rising. We find no consistent support for the market timing hypothesis, that issuers are more likely to select IPOs during periods when investors are over-optimistic such that subsequent market returns are negative, negatively related to IPO activity, or lower than market returns after exits by acquisition.

Number of Pages in PDF File: 40

Keywords: IPO, acquisition, exit choice, market timing, pseudo market timing, venture capital

JEL Classification: G14, G24, G32, G34

working papers series