The Dynamics of Entrepreneurial Firm Exit Choice and the IPO Valuation Premium: Theory and Evidence

Posted: 7 Jun 2023

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio - Alvarez College of Business

Thomas J. Chemmanur

Boston College - Carroll School of Management

Christos Mavrovitis (Mavis)

University of Surrey - Surrey Business School

Evangelos Vagenas-Nanos

University of Glasgow

Date Written: May 15, 2023

Abstract

We analyze the dynamics of private firms' exit choice between IPOs and acquisitions and the valuation premium of IPOs over acquisitions from pre-2000 to post-2000. We first develop a two-period theoretical model, where in each period, entrepreneurs with private information about the viability of their firm in product market competition choose between IPOs and acquisitions. A key driver of exit choice in each period is the potential help that acquirers can provide to target private firms if they choose to be acquired (“acquisition synergy”), whereas firms that choose to go public do not receive such help. In equilibrium, only higher quality private firms choose to exit through an IPO, while lower quality private firms choose to be acquired. We analyze the dynamics of the above single-period IPO versus acquisition choice by assuming a positive shock to acquisition synergy between the two periods (i.e., pre- versus post-2000). This generates the testable prediction that, while the quality of IPO firms increases after 2000, the average value of acquired firms also increases, leading to a potential shrinkage in the IPO valuation premium. We test the predictions of our model using a sample of private firm exits between 1995 and 2019. First, we find that the fraction of exiting firms that chose an IPO over an acquisition declined significantly in the post-2000 period compared to pre-2000. Second, the IPO valuation premium remains positive in both the pre-2000 and post-2000 periods. Third, the IPO valuation premium shrank significantly from the pre-2000 to the post-2000 period. Fourth, consistent with our theory, the reduction in the IPO valuation premium was significantly larger in the case of private firms in industries where the ability of potential acquirers to help exiting private firms is larger, namely, in more concentrated industries, in industries where the leading public firm had a greater market share, and in industries where measured synergies in M&As between publicly traded firms are larger. We conduct two identification tests. First, we conduct a direct test of our theory using a proxy for the acquisition synergy shock and show that the shrinkage of the IPO valuation premium is most pronounced in industries where there was an appreciable increase in acquisition synergy from before to after 2000. Second, we use an instrumental variable analysis to establish that our baseline results are causal.

Keywords: Private firm exits, Initial public offerings (IPOs), Acquisitions, IPO valuation premium dynamics, Decline in IPOs

JEL Classification: G24, G32

Suggested Citation

Bayar, Onur and Chemmanur, Thomas J. and Mavrovitis (Mavis), Christos and Vagenas-Nanos, Evangelos, The Dynamics of Entrepreneurial Firm Exit Choice and the IPO Valuation Premium: Theory and Evidence (May 15, 2023). Available at SSRN: https://ssrn.com/abstract=4471297

Onur Bayar

University of Texas at San Antonio - Alvarez 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 )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Christos Mavrovitis (Mavis)

University of Surrey - Surrey Business School ( email )

Guildford, Surrey GU2 7XH
United Kingdom

HOME PAGE: http://www.surrey.ac.uk/people/christos-p-mavis

Evangelos Vagenas-Nanos

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
295
PlumX Metrics