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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
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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

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