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What Drives the Valuation Premium in IPOs versus Acquisitions? An Empirical Analysis


Onur Bayar


University of Texas at San Antonio, College of Business

Thomas J. Chemmanur


Boston College - Carroll School of Management

December 21, 2011

Journal of Corporate Finance, Forthcoming

Abstract:     
Using a hand-collected data set of private firm acquisitions and IPOs, this paper develops the first empirical analysis in the literature of the "IPO valuation premium puzzle," which refers to a situation where many private firms choose to be acquired rather than to go public at higher valuations. We also test several new hypotheses regarding a private firm's choice between IPOs and acquisitions. Our analysis of private firm valuations in IPOs and acquisitions indicates that IPO valuation premia disappear for larger VC backed firms after controlling for various observable factors affecting a firm's propensity to choose IPOs over 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 larger non-VC backed firms and shrinks substantially for smaller firms as well. Our Heckman-style treatment effects regression analysis demonstrates that the above results are robust to controlling for the selection of exit mechanism by firm insiders based on unobservables. Our findings on private firms' choice between IPOs and acquisitions can be summarized as follows. First, firms operating in 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 to be acquired. Second, more capital intensive firms, those operating in industries characterized by greater private benefits of control, and those which are harder to value by IPO market investors 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.

Number of Pages in PDF File: 61

Keywords: IPOs, Acquisitions, Valuation premium, Private firms, Exit mechanisms, Going public

JEL Classification: G24, G32, G34

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Date posted: October 27, 2009 ; Last revised: February 12, 2012

Suggested Citation

Bayar, Onur and Chemmanur, Thomas J., What Drives the Valuation Premium in IPOs versus Acquisitions? An Empirical Analysis (December 21, 2011). Journal of Corporate Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1494058 or http://dx.doi.org/10.2139/ssrn.1494058

Contact Information

Onur Bayar
University of Texas at San Antonio, College of Business ( email )
The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)
Thomas J. Chemmanur (Contact Author)
Boston College - Carroll School of Management ( email )
440 Fulton Hall
Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)
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