IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists
University of Texas at San Antonio, College of Business
Thomas J. Chemmanur
Boston College - Carroll School of Management
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
We analyze a private firm's choice of exit mechanism between IPOs and acquisitions, and provide a resolution to the "IPO valuation premium puzzle." The private firm is run by an entrepreneur and a venture capitalist (insiders) who desire to exit partially from the firm. A crucial factor driving their exit choice is competition in the product market: while a stand-alone firm has to fend for itself after going public, an acquirer is able to provide considerable support to the firm in product market competition. A second factor is the difference in information asymmetry characterizing the two exit mechanisms. Finally, the private benefits of control accruing post-exit to the entrepreneur and the bargaining power of outside investors versus firm insiders are also different across the two mechanisms. We analyze two different situations: the first, where the entrepreneur can make the exit choice alone (independent of the venture capitalist) and the second, where the entrepreneur can make the exit choice only with the concurrence of the venture capitalist. We derive a number of testable implications regarding insiders' exit choice between IPOs and acquisitions and about the IPO valuation premium puzzle.
Number of Pages in PDF File: 71
Keywords: IPOs, acquisitions, venture capital, entrepreneurial finance, exit strategy, product market competition
JEL Classification: G24, G34Accepted Paper Series
Date posted: February 28, 2007 ; Last revised: October 29, 2010
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