The Exit Choices of Entrepreneurial Firms
Thomas J. Chemmanur
Boston College - Carroll School of Management
University of Georgia - Department of Banking and Finance
Louisiana State University
Debarshi K. Nandy
Brandeis University - International Business School
March 12, 2011
AFA 2012 Chicago Meetings Paper
How do a firm’s ex ante product market characteristics relate to its exit decision, namely, its choice between going public, being acquired, or remaining private? What is the relationship between a firm’s product market characteristics and its decision to exit through an acquisition by a public rather than a private acquirer (versus going public or remaining private)? Finally, how does a firm’s exit choice affect its subsequent product market performance? In this paper, we use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms, to answer these questions. Our findings can be summarized as follows. First, certain product market characteristics, namely, total factor productivity (TFP), size, sales growth, market share, capital expenditure ratio, capital intensity, and white-collar salary proportion significantly increase a private firm’s likelihood of an IPO relative to an acquisition. Second, private firms that obtained access to venture capital or bank loans are more likely to exit through an IPO relative to an acquisition. Third, private firms facing less information asymmetry and those with projects that are easier for outsiders to evaluate are more likely to exit through an IPO relative to an acquisition. Fourth, private firms with larger size, higher TFP, higher sales growth, higher capital expenditure ratios, and higher white-collar salary proportion are more likely to be acquired by public rather than by private firms. Fifth, private firms that operate in industries characterized by less information asymmetry, higher stock liquidity, and a larger number of already listed firms are more likely to be acquired by public rather than by private firms. Our analysis of the dynamics of private firm characteristics around exit indicates that, while both forms of exit occur at the peak of a firm’s productivity cycle, the rate of change of TFP before and after the exit year is more significant for IPO firms than for firms that are acquired. Sales growth also exhibits an inverted U-shaped pattern for IPO firms and the firms that are acquired, though the peak years for these two groups of firms are different. Finally, sales, capital expenditures, and total employment exhibit a consistently increasing pattern over the years before and after the exit year for IPO firms but an inverted U-shaped pattern for firms that are acquired.
Number of Pages in PDF File: 64
Keywords: Initial Public Offerings, Merger and Acquisitions, Product market
JEL Classification: G32, G24, G14working papers series
Date posted: January 13, 2010 ; Last revised: January 20, 2012
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