Hostname: page-component-68945f75b7-77sjt Total loading time: 0 Render date: 2024-09-03T09:44:30.943Z Has data issue: false hasContentIssue false
  • English
  • Français

A Theory of Merger-Driven IPOs

Published online by Cambridge University Press:  07 June 2011

Jim Hsieh ,
Evgeny Lyandres  and
Alexei Zhdanov
Jim Hsieh
Affiliation:
School of Management, George Mason University, 4400 University Dr., Fairfax, VA 22030, jhsieh@gmu.edu
Evgeny Lyandres
Affiliation:
School of Management, Boston University, 595 Commonwealth Ave., Boston, MA 02445, lyandres@bu.edu
Alexei Zhdanov
Affiliation:
University of Lausanne, Extranef 237, Lausanne 1007, Switzerland and Swiss Finance Institute. azhdanov@unil.ch
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a model that links a firm’s decision to go public with its subsequent takeover strategy. A private bidder does not know a firm’s true valuation, which affects its gain from a potential takeover. Consequently, a private bidder pursues a suboptimal restructuring policy. An alternative route is to complete an initial public offering (IPO) first. An IPO reduces valuation uncertainty, leading to a more efficient acquisition strategy, therefore enhancing firm value. We calibrate the model using data on IPOs and mergers and acquisitions (M&As). The resulting comparative statics generate several novel qualitative and quantitative predictions, which complement the predictions of other theories linking IPOs and M&As. For example, the time it takes a newly public firm to attempt an acquisition of another firm is expected to increase in the degree of valuation uncertainty prior to the firm’s IPO and in the cost of going public, and it is expected to decrease in the valuation surprise realized at the time of the IPO. We find strong empirical support for the model’s predictions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 5 , October 2011 , pp. 1367 - 1405
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel, A. B. “Optimal Investment Under Uncertainty.” American Economic Review, 73 (1983), 228–233.Google Scholar
Alti, A. “IPO Market Timing.” Review of Financial Studies, 18 (2005), 1105–1138.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “Liquidity and Asset Prices: Financial Management Implications.” Financial Management, 17 (1988), 5–15.CrossRefGoogle Scholar
Andrade, G., and Stafford, E.. “Investigating the Economic Role of Mergers.” Journal of Corporate Finance, 10 (2004), 1–36.Google Scholar
Beatty, R. P., and Ritter, J. R.. “Investment Banking, Reputation, and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 15 (1986), 213–232.Google Scholar
Benninga, S.; Helmantel, M.; and Sarig, O.. “The Timing of Initial Public Offerings.” Journal of Financial Economics, 75 (2005), 115–132.Google Scholar
Benveniste, L. M.; Busaba, W. Y.; and Wilhelm, W. J. Jr. “Information Externalities and the Role of Underwriters in Primary Equity Markets.” Journal of Financial Intermediation, 11 (2002), 61–86.CrossRefGoogle Scholar
Benveniste, L. M., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics, 24 (1989), 343–361.Google Scholar
Bernile, G.; Lyandres, E.; and Zhdanov, A.. “A Theory of Strategic Mergers.” Review of Finance, forthcoming (2011).Google Scholar
Boudoukh, J.; Michaely, R.; Richardson, M.; and Roberts, M. R.. “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.” Journal of Finance, 62 (2007), 877–915.CrossRefGoogle Scholar
Bradley, D. J., and Jordan, B. D.. “Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis, 37 (2002), 595–616.Google Scholar
Brau, J. C., and Fawcett, S. E.. “Initial Public Offerings: An Analysis of Theory and Practice.” Journal of Finance, 61 (2006), 399–436.CrossRefGoogle Scholar
Brau, J. C.; Francis, B.; and Kohers, N.. “The Choice of IPO versus Takeover: Empirical Evidence.” Journal of Business, 76 (2003), 583–612.Google Scholar
Celikyurt, U.; Sevilir, M.; and Shivdasani, A.. “Going Public to Acquire: The Acquisition Motive in IPOs.” Journal of Financial Economics, 96 (2010), 345–363.Google Scholar
Chemmanur, T. J., and Fulghieri, P.. “A Theory of the Going-Public Decision.” Review of Financial Studies, 12 (1999), 249–279.CrossRefGoogle Scholar
Chen, H.-C., and Ritter, J. R.. “The Seven Percent Solution.” Journal of Finance, 55 (2000), 1105–1131.CrossRefGoogle Scholar
Derrien, F., and Kecskés, A.. “The Initial Public Offerings of Listed Firms.” Journal of Finance, 62 (2007), 447–479.CrossRefGoogle Scholar
Dow, J., and Gorton, G.. “Stock Market Efficiency and Economic Efficiency: Is There a Connection?” Journal of Finance, 52 (1997), 1087–1129.CrossRefGoogle Scholar
Eckbo, B. E.; Giammarino, R. M.; and Heinkel, R. L.. “Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests.” Review of Financial Studies, 3 (1990), 651–675.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.Google Scholar
Fishman, M. J. “Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions.” Journal of Finance, 44 (1989), 41–57.Google Scholar
Hackbarth, D., and Miao, J.. “The Dynamics of Mergers and Acquisitions in Oligopolistic Industries.” Working Paper, University of Illinois and Boston University (2007).Google Scholar
Hackbarth, D., and Morellec, E.. “Stock Returns in Mergers and Acquisitions.” Journal of Finance, 63 (2008), 1213–1252.Google Scholar
Hanley, K. W. “The Underpricing of Initial Public Offerings and the Partial Adjustment Phenomenon.” Journal of Financial Economics, 34 (1993), 231–250.Google Scholar
Hansen, R. G. “A Theory for the Choice of Exchange Medium in the Market for Corporate Control.” Journal of Business, 60 (1987), 75–95.CrossRefGoogle Scholar
Harford, J. “What Drives Merger Waves.” Journal of Financial Economics, 77 (2005), 529–560.CrossRefGoogle Scholar
Holmström, B., and Tirole, J.. “Market Liquidity and Performance Monitoring.” Journal of Political Economy, 101 (1993), 678–709.CrossRefGoogle Scholar
Hovakimian, A., and Hutton, I.. “Merger-Motivated IPOs.” Financial Management, 39 (2010), 1547–1573.Google Scholar
Jovanovic, B., and Rousseau, P. L.. “The Q-Theory of Mergers.” American Economic Review, 92 (2002), 198–204.Google Scholar
Kecskés, A. “Initial Public Offerings: The Origin of Investor Recognition? “ Working Paper, Virginia Tech (2008).Google Scholar
Lambrecht, B. M. “The Timing and Terms of Mergers Motivated by Economies of Scale.” Journal of Financial Economics, 72 (2004), 41–62.Google Scholar
Lambrecht, B. M., and Myers, S. C.. “A Theory of Takeovers and Disinvestment.” Journal of Finance, 62 (2007), 809–845.CrossRefGoogle Scholar
Leahy, J. V., and Whited, T. M.. “The Effect of Uncertainty on Investment: Some Stylized Facts.” Journal of Money, Credit, and Banking, 28 (1996), 64–83.CrossRefGoogle Scholar
Leland, H. E. “Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance.” Journal of Finance, 62 (2007), 765–807.Google Scholar
Ljungqvist, A., and Wilhelm, W. J. Jr. “IPO Pricing and the Dot-Com Bubble.” Journal of Finance, 58 (2003), 723–752.CrossRefGoogle Scholar
Loughran, T., and Ritter, J. R.. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361–389.Google Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed over Time.” Financial Management, 33 (2004), 5–37.Google Scholar
Lowry, M.; Officer, M. S.; and Schwert, G. W.. “The Variability of IPO Initial Returns.” Journal of Finance, 65 (2010), 425–465.CrossRefGoogle Scholar
Luo, Y. “Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions.” Journal of Finance, 60 (2005), 1951–1982.Google Scholar
Maksimovic, V., and Phillips, G.. “The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains.” Journal of Finance, 56 (2001), 2019–2065.Google Scholar
Maksimovic, V., and Phillips, G.. “Do Conglomerate Firms Allocate Resources Inefficiently across Industries? Theory and Evidence.” Journal of Finance, 57 (2002), 721–767.Google Scholar
Maksimovic, V.; Phillips, G.; and Yang, L.. “Public and Private Merger Waves.” Working Paper, University of Maryland (2010).CrossRefGoogle Scholar
Maksimovic, V., and Pichler, P.. “Technological Innovation and Initial Public Offerings.” Review of Financial Studies, 14 (2001), 459–494.Google Scholar
Margsiri, W.; Mello, A. S.; and Ruckes, M. E.. “A Dynamic Analysis of Growth via Acquisitions.” Review of Finance, 12 (2008), 635–671.Google Scholar
McDonald, R., and Siegel, D.. “The Value of Waiting to Invest.” Quarterly Journal of Economics, 101 (1986), 707–727.Google Scholar
Mello, A. S., and Parsons, J. E.. “Going Public and the Ownership Structure of the Firm.” Journal of Financial Economics, 49 (1998), 79–109.CrossRefGoogle Scholar
Mikkelson, W. H.; Partch, M. M.; and Shah, K.. “Ownership and Operating Performance of Companies That Go Public.” Journal of Financial Economics, 44 (1997), 281–307.CrossRefGoogle Scholar
Mitchell, M. L., and Mulherin, J. H.. “The Impact of Industry Shocks on Takeover and Restructuring Activity.” Journal of Financial Economics, 41 (1996), 193–229.Google Scholar
Morellec, E., and Zhdanov, A.. “The Dynamics of Mergers and Acquisitions.” Journal of Financial Economics, 77 (2005), 649–672.CrossRefGoogle Scholar
Morellec, E., and Zhdanov, A.. “Financing and Takeovers.” Journal of Financial Economics, 87 (2008), 556–581.Google Scholar
Pindyck, R. S. “Irreversible Investment, Capacity Choice, and the Value of the Firm.” American Economic Review, 78 (1988), 969–985.Google Scholar
Rau, P. R., and Stouraitis, A.. “Patterns in the Timing of Corporate Event Waves.” Journal of Financial and Quantitative Analysis, 46 (2011), 209–246.Google Scholar
Ritter, J. R., and Welch, I.. “A Review of IPO Activity, Pricing and Allocations.” Journal of Finance, 57 (2002), 1795–1828.Google Scholar
Roberts, K., and Weitzman, M. L.. “Funding Criteria for Research, Development, and Exploration Projects.” Econometrica, 49 (1981), 1261–1288.Google Scholar
Schultz, P., and Zaman, M.. “Do the Individuals Closest to Internet Firms Believe They Are Overvalued?” Journal of Financial Economics, 59 (2001), 347–381.Google Scholar
Stiglitz, J. E., and Weiss, A.. “Credit Rationing in Markets with Imperfect Information.” American Economic Review, 71 (1981), 393–410.Google Scholar
Stoughton, N. M.; Wong, K. P.; and Zechner, J.. “IPOs and Product Quality.” Journal of Business, 74 (2001), 375–408.CrossRefGoogle Scholar
Strebulaev, I. A. “Do Tests of Capital Structure Mean What They Say?” Journal of Finance, 62 (2007), 1747–1787.CrossRefGoogle Scholar
Subrahmanyam, A., and Titman, S.. “Feedback from Stock Prices to Cash Flows.” Journal of Finance, 56 (2001), 2389–2413.Google Scholar
Zingales, L. “Inside Ownership and the Decision to Go Public.” Review of Economic Studies, 62 (1995), 425–448.CrossRefGoogle Scholar