Information Frictions in the Market for Startup Acquisitions
49 Pages Posted: 25 Aug 2020 Last revised: 4 Sep 2020
Date Written: August 21, 2020
We document and quantify the importance of information frictions in the market for startup acquisitions. Examining a sample of 5,729 Israeli venture-backed startups, we implement machine learning algorithms to generate dyads of technologically similar companies. Difference-in-differences and instrumental variable models show that the acquisition of a startup by a foreign company increases the chances that its technologically-related pair is also acquired by a foreign company by approximately 56%. This effect is largest for later-stage startups, as they are relatively close to exit, and for acquisitions that are prominent in the news. Consistent with information frictions being more severe for distant acquirers, acquisitions of Israeli startups by foreign companies minimally affect the pairs' likelihood of being acquired domestically. Foreign companies are insensitive to acquisitions of Israeli startups by domestic incumbents, indicating that the information value of an acquisition is greatest when the acquirer is foreign. Investors do not increase their investments in startups whose pairs have been acquired by a foreign company as improved information leads them to offload their portfolios. Accordingly, these startups are not acquired at a higher price.
Keywords: Entrepreneurship, Acquisitions, Information Frictions, Venture Capital
JEL Classification: G24, G34, G4, L1, L2, L26, O3
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