Information Frictions in the Market for Startup Acquisitions

49 Pages Posted: 25 Aug 2020 Last revised: 4 Sep 2020

See all articles by Annamaria Conti

Annamaria Conti

University of Lausanne

Jorge Guzman

Columbia University - Columbia Business School

Ron Rabi

University of Lausanne

Date Written: August 21, 2020

Abstract

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

Suggested Citation

Conti, Annamaria and Guzman, Jorge and Rabi, Ron, Information Frictions in the Market for Startup Acquisitions (August 21, 2020). Available at SSRN: https://ssrn.com/abstract=3678676 or http://dx.doi.org/10.2139/ssrn.3678676

Annamaria Conti (Contact Author)

University of Lausanne ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Jorge Guzman

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Ron Rabi

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland
0041788354395 (Phone)
1020 (Fax)

HOME PAGE: http://https://applicationspub.unil.ch/interpub/noauth/php/Un/UnPers.php?PerNum=1214661&LanCode=37

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