IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists

2011 ◽  
Vol 46 (6) ◽  
pp. 1755-1793 ◽  
Author(s):  
Onur Bayar ◽  
Thomas J. Chemmanur
Keyword(s):  
Initial Public Offerings ◽  
Market Competition ◽  
Product Market ◽  
Venture Capitalists ◽  
Public Offerings ◽  
Exit Mechanism ◽  
The Difference ◽  
Exit Choice ◽  
Premium Puzzle ◽  
Considerable Support

AbstractWe analyze a private firm’s choice of exit mechanism between initial public offerings (IPOs) and acquisitions, and we provide a resolution to the “IPO valuation premium puzzle.” The private firm is run by an entrepreneur and a venture capitalist (VC) (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 to the entrepreneur post-exit and the bargaining power of outside investors versus firm insiders are also different across the two mechanisms. We analyze two situations: the first, where the entrepreneur can make the exit choice alone (independent of the VC), and the second, where the entrepreneur can make the exit choice only with the concurrence of the VC. We derive a number of testable implications regarding insiders’ exit choice between IPOs and acquisitions and about the IPO valuation premium puzzle.

scholarly journals Role Of Underwriters In Restraining Earnings Management In Initial Public Offerings

2012 ◽  
Vol 28 (4) ◽  
pp. 709 ◽  
Author(s):  
Hei Wai Lee ◽  
Yan Alice Xie ◽  
Jian Zhou
Keyword(s):  
Earnings Management ◽  
Initial Public Offerings ◽  
The Internet ◽  
Venture Capitalists ◽  
Font Size ◽  
Going Public ◽  
Public Offerings ◽  
Investment Bankers ◽  
Sarbanes Oxley

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoNormal"><span style="font-family: Times New Roman;"><span style="font-size: 10pt;">We investigate the </span><span style="font-size: 10pt; mso-fareast-language: ZH-CN;">relationship</span><span style="font-size: 10pt;"> between underwriter</span><span style="font-size: 10pt; mso-fareast-language: ZH-CN;"> reputation</span><span style="font-size: 10pt;"> and earnings management of IPO firms over the period of 1991-2005. We find that </span><span style="font-size: 10pt; mso-fareast-language: ZH-CN;">IPO firms engage in less earnings management</span><span style="font-size: 10pt;"> if </span><span style="font-size: 10pt; mso-fareast-language: ZH-CN;">they</span><span style="font-size: 10pt;"> are underwritten by prestigious investment bankers. Furthermore, the role of prestigious underwriters in restraining earnings management of IPO issuers do not change during the Internet Bubble period or after the passage of the Sarbanes-Oxley Act (SOX). The findings support the certification role of underwriters in the IPO process.<span style="mso-spacerun: yes;"> </span>We also document that</span><span style="font-size: 10pt; mso-fareast-language: ZH-CN;"> firms going public in the post-SOX period engage in less earnings management compared to firms going public in the pre-SOX period</span><span style="font-size: 10pt;">. Further findings suggest that the changing objectives of venture capitalists may explain the reduction in the level of earnings management of IPO firms following the passage of SOX.</span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

Product Boundaries of the Software Market Within the Context of Competition Policy

2016 ◽  
Vol 2016 (6) ◽  
pp. 39-56
Author(s):  
Andrey Shastitko ◽  
Alexandr Kurdin ◽  
Anastasiya Morosanova
Keyword(s):  
Competition Policy ◽  
Network Effects ◽  
Legal Status ◽  
Market Competition ◽  
Product Market ◽  
Intellectual Activity ◽  
Legal Cases ◽  
Competition Analysis ◽  
Software Market ◽  
The Difference

The article analyses the main features of the intellectual activity results market through the lens of the product boundaries definition. Frequently the pirated copy is not considered as a substitute for original products in legal cases. However, unlicensed computer programs should be included in the product market boundaries regardless of its legal status if the consumer considers them as substitutes. The difference between these types of products (original and pirated) are hidden not in transformation but in transaction characteristics. It is also important to take into consideration the possible complementarity between pirated and original products expressed in the information and network effects. In order to assess the buyers’ choice it is necessary to adjust the methods evaluating product market boundaries prescribed by «The Procedure of market competition analysis» of the Russia’s Federal Antimonopoly Service.

INITIAL PUBLIC OFFERINGS AND PRE-IPO SHAREHOLDERS: ANGELS VERSUS VENTURE CAPITALISTS

2012 ◽  
Vol 17 (04) ◽  
pp. 1250022 ◽  
Author(s):  
WILLIAM C. JOHNSON ◽  
JEFFREY E. SOHL
Keyword(s):  
Initial Public Offerings ◽  
Initial Public Offering ◽  
Early Stage ◽  
Equity Capital ◽  
Venture Capitalists ◽  
Public Offerings ◽  
Corporate Investors ◽  
Public Offering ◽  
Angel Investors

At the time of an initial public offering, shares in a firm are typically held by venture capitalists, insiders, corporate investors and angel investors. We examine the role of angel investors in the IPO process. We find that angel investors provide equity capital in industries venture capitalists are less likely to serve and that shareholders in angel backed IPO firms are more likely to sell their shares at the time of the offering. Where venture capital backed IPO firms have higher underpricing, angel backed IPO firms do not, implying that angels may be the preferred investors for early-stage firms.

The impact of the quality of VC financing and monitoring on the survival of IPO firms

2017 ◽  
Vol 43 (4) ◽  
pp. 440-451 ◽  
Author(s):  
Sophie Pommet
Keyword(s):  
Initial Public Offerings ◽  
Survival Rates ◽  
Venture Capitalist ◽  
Venture Capitalists ◽  
Content Type ◽  
Public Offerings ◽  
Advantages And Disadvantages ◽  
Short Run ◽  
The Impact

Purpose The purpose of this paper is to analyze the impact of venture capital (VC) involvement on the survival rate of French initial public offerings (IPOs) during the period 1996-2006. The paper examines the link between the survival rates of IPO companies, and several proxies for the quality of venture capitalist financing and monitoring. Design/methodology/approach To analyze the impact of the involvement of VC on both long and short run post-IPO survival, two methods are used: survival analysis (the Cox proportional hazard), and a logit model. Findings This paper shows that the quality of venture capitalist monitoring, measured by the duration of their investment before the IPO, is positively correlated with company survival rates. However, the author does not find the expected result when the author considers the experience of venture capitalists measured by their age. Research limitations/implications The findings are limited to a sample of VC-backed companies that went public. Practical implications The findings have implications for entrepreneurs. When analyzing the advantages and disadvantages linked to the presence of VC firms in the capital of their companies, entrepreneurs should consider that certain types of venture capitalists might be more or less able to be involved in the monitoring and value adding process. Originality/value To date, there is no comprehensive study on the French IPO market analyzing both long and short run post-IPO survival of VC-backed companies. This paper fills this gap.

Product market competition, cash flow and corporate investments

2018 ◽  
Vol 44 (2) ◽  
pp. 207-221 ◽  
Author(s):  
Hussein Ali Ahmad Abdoh ◽  
Oscar Varela
Keyword(s):  
Cash Flow ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Growth Firms ◽  
Capital Spending ◽  
The Difference ◽  
The Impact

Purpose The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects. Design/methodology/approach The Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method. Findings The results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms. Practical implications The role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency. Originality/value Many firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

scholarly journals Pricing And Long-Run Performance Of The Venture-Backed And Nonventure-Backed IPOS

2011 ◽  
Vol 2 (6) ◽  
Author(s):  
Arvin Ghosh
Keyword(s):  
Stock Market ◽  
Venture Capital ◽  
Initial Public Offerings ◽  
Cash Flows ◽  
Venture Capitalists ◽  
Regression Equations ◽  
Public Offerings ◽  
Long Run ◽  
First Time ◽  
Prevalent Form

Initial Public Offerings (IPOs) were the most prevalent form to raise capital by firms wanting to go public during the last decade (1990 2000) in the United State. There were thousands of firms that went public for the first time, mostly in the technology-heavy NASDAQ stock market. Along with the regular IPOs came the IPOs backed by venture capitalists, who specialize in financing promising startup companies and bringing them public. As one-third of the IPOs were backed by venture capitalists during 1990 2000, our purpose here is to examine the pricing and long-run performance of the venture-backed and nonventure-backed IPOs that were issued in the NYSE and NASDAQ stock market during the period covered by our study. We have found, among others, that the venture-backed IPOs performed much better as compared to the nonventure-backed IPOs. The returns of the former were consistently higher than the latter during 1900 2000. Also, the price returns as well as the operating ratios and the growth of cash flows, were higher both in the NYSE and NASDAQ market. The regression equations also confirmed closer association with the independent variables belonging to the IPOs backed by venture capital than the non-venture capital.

scholarly journals Asymmetric Information in the Market for IPOs

2019 ◽  
Vol 7 (3) ◽  
pp. 01-19
Author(s):  
Heather N Rhodes
Keyword(s):  
Asymmetric Information ◽  
Moral Hazard ◽  
Initial Public Offerings ◽  
Wealth Effect ◽  
Matched Sample ◽  
Going Public ◽  
Public Offerings ◽  
Sarbanes Oxley ◽  
The Difference ◽  
Selection Of

This study utilizes hand-collected ownership data to re-examine the signaling, agency and wealth effect theories in a matched-sample of initial public offerings (IPOs) issued in the U.S. prior to and following the passage of the Sarbanes-Oxley Act of 2002 (SOX). SOX provides some motivation for revisiting these topics because evidence exists that it may have affected the types of firms going public and ultimately the relatively importance of adverse selection and moral hazard, the asymmetric information problems with which these theories are concerned. Results on both the pre- and post-SOX samples are consistent with the signaling theory and evidence of a wealth effect exists in both eras. However, in contrast to results of studies conducted prior to SOX, both the pre- and post-SOX results give little credence to the agency theory, suggesting that SOX has not impacted investors’ concerns regarding moral hazard. Rather, the difference between the pre-SOX results and the results of previous studies suggests that SOX appeared to reduce moral hazard concerns only through its effect on the self-selection of firms going public.

Performance of VC/PE-backed IPOs: New Insights from India

2020 ◽  
pp. 097215092095054
Author(s):  
Soumya G. Deb ◽  
Pradip Banerjee
Keyword(s):  
Initial Public Offerings ◽  
Private Equity ◽  
Operating Performance ◽  
Equity Market ◽  
Venture Capitalists ◽  
Public Offerings ◽  
Market Perception ◽  
Using Data

This article explores long-term equity and operating performance of Indian firms issuing initial public offerings (IPOs) backed by venture capital/private equity (VC/PE) funding. Using data for 173 IPOs backed by VC/PE funding during 2000–2016, the article shows that equity market performance of VC/PE-backed IPOs is unimpressive post issue, compared to their peers. This is not only due to market perception but also associated with a declining operating performance. However, information asymmetry, mispricing and ‘timing the market’ by issuing firms do not seem to be the reasons for such long-term underperformance. We argue that it may be a case of too much money chasing too few winners for Indian IPOs and individual rent-seeking activities by managers. The observation raises the question of effectiveness of the monitoring role of venture capitalists or PE funders post the IPO in an Indian context. This is substantiated by our additional finding that sustained monitoring and hand-holding by venture capitalists and PE funders post the IPO cause an improvement in performance. The findings of this study can have significant implications for all stakeholders, particularly common investors in the Indian equity market.

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