Information asymmetries between buyers and sellers can create inefficiencies in mergers & acquisition (M&A) markets and prevent acquirers from gaining access to valuable resources and capabilities via acquisitions. Entrepreneurial firms face similar problems in raising external capital, due to the asymmetric information that separates them from prospective investors. In this article, we bring together the strategy, financial economics and entrepreneurship literatures and exploit the initial public offering (IPO) context to examine the informational characteristics of newly public entrepreneurial firms. We construct hazard models that offer strong evidence that certain IPO characteristics signal the value of entrepreneurial firms and thereby attract M&A suitors.
Acs, Z.J. and Audretsch, D.B. (1987) `Innovation, Market Structure and Firm Size', Review of Economics and Statistics69: 567—74.
2.
Aggarwal, R.K., Krigman, L. and Womack, K.L. (2002) `Strategic IPO Underpricing, Information Momentum and Lockup Expiration Selling', Journal of Financial Economics66: 105—37.
3.
Akerlof, G.A. (1970) `The Market for “Lemons”: Quality Uncertainty and the Market Mechanism', Quarterly Journal of Economics84: 488—500.
4.
Allen, F. and Faulhaber, G.R. (1989) `Signaling by Underpricing in the IPO Market', Journal of Financial Economics23: 303—23.
5.
Amit, R., Glosten, L. and Muller, E. (1990) `Entrepreneurial Ability, Venture Investments and Risk Sharing', Management Science38: 1232—45.
6.
Anand, J. and Singh, H. (1997) `Asset Redeployment, Acquisitions and Corporate Strategy in Declining Industries', Strategic Management Journal18: 99—118.
7.
Andrade, G., Mitchell, M. and Stafford, E. (2001) `New Evidence and Perspectives on Mergers', Journal of Economic Perspectives15: 103—20.
8.
Arrow, K.J. (1974) The Limits of Organization. New York: W. W. Norton.
9.
Audretsch, D.B. (2002) `The Dynamic Role of Small Firms: Evidence from the U.S.'. Small Business Economics18: 13—40.
10.
Axelrod, R. (1984) The Evolution of Cooperation. New York: Basic Books.
11.
Balakrishnan, S. and Koza, M.P. (1993) `Information Asymmetry, Adverse Selection and Joint Ventures', Journal of Economic Behavior and Organization20: 99—117.
12.
Barzel, Y. (1987) `The Entrepreneur's Reward for Self-policing', Economic Inquiry25: 103—16.
13.
Baum, J.T. (1996) `Organization Ecology', in S. Clegg, C. Hardy and W. Nord (eds) Handbook of Organizational Studies , pp. 77—114. London: Sage.
14.
Beatty, R. and Ritter, J.R. (1986) `Investment Banking, Reputation and the Underpricing of Initial Public Offerings', Journal of Financial Economics15: 213—32.
15.
Beatty, R.P. and Welch, I. (1996) `Issuer Expenses and Legal Liability in Initial Public Offerings', Journal of Law and Economics39: 545—602.
16.
Belsey, D.A., Kuh, E. and Welsch, R.E. (1980) Regression Diagnostics: Identifying Influential Data and Sources of Collinearity. New York: John Wiley & Sons.
17.
Benveniste, W.J. and Wilhelm, Jr. ( 1990) `A Comparative Analysis of IPO Proceeds Under Alternative Regulatory Environments', Journal of Financial Economics28: 173—207.
18.
Brau, J.C. and Kohers, N. (2005) `Dual Track IPOs versus Single Track Takeovers: Does the Road Less Traveled Make all the Difference?' Working Paper.
19.
Brav, A. and Gompers, P.A. (1997) `Myth or Reality? The Long-run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-backed Companies', Journal of Finance52: 1791—821.
20.
Bruton, G.D., Oviatt, B.M. and White, M.A. (1994) `Performance of Acquisitions of Distressed Firms ', Academy of Management Journal37: 972—89.
21.
Capron, L. (1999) `The Long-term Performance of Horizontal Acquisitions ', Strategic Management Journal20: 987—1018.
22.
Capron, L. and Pistre, N. (2002) `When do Acquirers Earn Abnormal Returns?' Strategic Management Journal23: 781—94.
23.
Carter, R. and Manaster, S. (1990) `Initial Public Offerings and Underwriter Reputation' , Journal of Finance45: 1045—67.
24.
Carter, R.B., Dark, R.H. and Singh, A.K. (1998) `Underwriter Reputation, Initial Returns and the Long-run Performance of IPO Stocks', Journal of Finance53: 285—311.
25.
Casson, M. (1995) Entrepreneurship and Business Culture. Aldershot and Brookfield: Edward Elgar.
26.
Chatterjee, S. (1986) `Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms', Strategic Management Journal7: 119—39.
27.
Chung, K.H. and Pruitt, S.W. (1994) `A Simple Approximation of Tobin's q', Financial Management23: 70—4.
28.
Cooper, A., Dunkelberg, W. and Woo, C. (1988) `Survival and Failure: A Longitudinal Study', in B. Kirchhoff, W. Long, W. McMullan, K. Vesper and W. Wetzel (eds) Frontiers of Entrepreneurship Research, pp. 225—37. Babson Park: Babson College.
29.
Cox, D.R. (1972) `Regression Models and Life Tables', Journal of the Royal Statistical Society34: 187—220.
30.
Datar, S., Frankel, R. and Wolfson, M. (2001) `Earnouts: The Effects of Adverse Selection and Agency Costs on Acquisition Techniques', Journal of Law, Economics and Organization17: 201—38.
31.
Delacroix, J. and Swaminathan, A. (1991) `Cosmetic, Speculative and Adaptive Organization Change in the Wine Industry', Administrative Science Quarterly26: 631—61.
32.
Demers, E. and Lewellen, K. (2003) `The Marketing Role of IPOs: Evidence from Internet Stocks', Journal of Financial Economics68: 413—37.
33.
Draho, J. (2004) The IPO Decision: Why and How Companies Go Public . Cheltenham: Edward Elgar Publishing .
34.
Dunbar, C.G. (2000) `Factors Affecting Investment Bank Initial Public Offering Market Share', Journal of Financial Economics55: 3—41.
35.
Eckbo, B.E., Giammarino, R.M. and Heinkel, R.L. (1990) `Asymmetric Information and the Medium of Exchange in Takeovers: Theory and Tests', Review of Financial Studies3: 651—75.
36.
Field, L.C. and Karpoff, J.M. (2002) `Takeover Defenses of IPO Firms', Journal of Finance57: 1857—89.
37.
Fishman, M.J. (1989) `Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions', Journal of Finance44: 41—57.
38.
Garmaise, M.J. and Moskowitz, T.J. (2004) `Confronting Information Asymmetries: Evidence from Real Estate Markets', Review of Financial Studies17: 405—37.
39.
Gompers, P. (1996) `Grandstanding in the Venture Capital Industry' , Journal of Financial Economics42: 133—156.
40.
Gorman, M. and Sahlman, W. (1989) `What do Venture Capitalists Do?'Journal of Business Venturing4: 231—48.
41.
Graebner, M.E. and Eisenhardt, K.M. (2004) `The Seller's Side of the Story: Acquisition as Courtship and Governance as Syndicate in Entrepreneurial Firms', Administrative Science Quarterly49: 366—403.
Gulati, R. and Higgins, M.C. (2003) `Which Ties Matter When? The Contingent Effects of Interorganizational Partnerships on IPO Success', Strategic Management Journal24: 127—44.
44.
Haleblian, J. and Finkelstein, S. (1999) `The Influence of Organizational Acquisition Experience on Acquisition Performance: A Behavioral Learning Perspective', Administrative Science Quarterly44: 29—56.
45.
Hambrick, D.C., MacMillan, I.C. and Day, D.L. (1982) `Strategic Attributes and Performance in the BCG Matrix: A PIMS-based Analysis of Industrial Product Businesses', Academy of Management Journal25: 510—31.
46.
Hansen, R.G. (1987) `A Theory for the Choice of Exchange Medium in Mergers and Acquisitions', Journal of Business60: 75—95.
47.
Harrison, J.S., Hitt, M.A., Hoskisson, R.E. and Ireland, R.D. (1991) `Synergies and Post-Acquisition Performance: Differences and Similarities in Resource Allocations', Journal of Management17: 173—90.
48.
Hellman, T. and Puri, M. (2000) `The Interaction Between Product Market and Financing Strategy: The Role of Venture Capital', The Review of Financial Studies13: 959—84.
49.
Hibbard, J. (2004) `How to Drive Suitors Wild', BusinessWeek (August 2): 74.
50.
Higgins, M.C. and Gulati, R. (2003) `Getting off to a Good Start: The Effects of Upper Echelon Affiliations on Underwriter Prestige', Organization Science14: 244—64.
51.
Holmstrom, B. and Tirole, J. (1993) `Market Liquidity and Performance Monitoring', Journal of Political Economy101: 678—709.
52.
Hulburt, H.M. and Scherr, F.C. (2003) `Determinants of the Collateralization of Credit by Small Firms', Managerial and Decision Economics24: 483—501.
53.
Ibbotson, R.G. (1975) `Price Performance of Common Stock New Issues', Journal of Financial Economics22: 235—72.
54.
Ibbotson, R.G., Ritter, J.R. and Sindelar, J.L. (1994) `The Market's Problems with the Pricing of Initial Public Offerings', Journal of Applied Corporate Finance7: 66—74.
55.
Jain, B.A. and Kini, O. (1995) `Venture Capitalist Participation and the Post-Issue Operating Performance of IPO Firms', Managerial and Decision Economics16: 593—606.
56.
Jenkinson, T. and Ljungqvist, A. (2001) Going Public: The Theory and Evidence on How Companies Raise Equity Finance, 2nd edn. Oxford: Oxford University Press.
57.
Kohers, N. and Ang, J. (2000) `Earnouts in Mergers: Agreeing to Disagree and Agreeing to Stay', Journal of Business73: 445—76.
58.
Krigman, L., Shaw, W.H. and Womack, K.L. (2001) `Why Do Firms Switch Underwriters?', Journal of Financial Economics60: 245—84.
59.
Loughran, T. and Ritter, J.R. (2002) `Why Don't Issuers Get Upset about Leaving Money on the Table in IPOs?', Review of Financial Studies15: 413—43.
60.
Loughran, T. and Ritter, J.R. (2004) `Why Has IPO Underpricing Changed Over Time?' Financial Management33: 5—37.
61.
Lubatkin, M. (1987) `Merger Strategies and Shareholder Value', Strategic Management Journal8: 39—53.
62.
McGahan, A.M. (1999) `The Performance of US Corporations: 1981—1994 ', Journal of Industrial Economics47: 373—98.
63.
Megginson, W.L. and Weiss, K.A. (1991) `Venture Capitalist Certification in Initial Public Offerings', Journal of Finance46: 879—903.
64.
Michaely, R. and Shaw, W.H. (1994) `The Pricing of Initial Public Offerings: Tests of Adverse Selection and Signaling Theories', Review of Financial Studies7: 279—319.
65.
Mikkelson, W.H., Partch, M.M. and Shah, K. (1997) `Ownership and Operating Performance of Companies that Go Public', Journal of Financial Economics44: 281—307.
66.
Milgrom, P. and Roberts, J. (1982) `Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis. Econometrica50: 443—59.
67.
Milgrom, P. and Stokey, N. (1982) `Information, Trade and Common Knowledge', Journal of Economic Theory26: 17—27.
68.
Neter, J., Wasserman, W. and Kutner, M.H. (1985) Applied Linear Statistical Models, 2nd edn. Homewood, IL: Irwin.
69.
Podolny, J.M. (1993) `A Status-Based Model of Market Competition', American Journal of Sociology98: 829—72.
70.
Pollock, T. (2004) `The Benefits and Costs of Underwriters' Social Capital in the US Initial Public Offerings Market', Strategic Organization2: 357—88.
71.
Puranam, P., Powell, B.C. and Singh, H. (forthcoming) `Due Diligence Failure as a Signal Detection Problem ', Strategic Organization.
72.
Reuer, J.J. and Ragozzino, R. (forthcoming) `Adverse Selection and M&A Design: The Roles of Alliances and IPOs', Journal of Economic Behavior and Organization.
73.
Riley, J.C. (2001) `Silver Signals: Twenty-five Years of Screening and Signaling', Journal of Economic Literature39: 432—78.
74.
Scherer, F.M. and Ross, D. (1990) Industrial Market Structure and Economic Performance , 3rd edn. Boston, MA: Houghton Mifflin.
75.
Shane, S. and Cable, D. (2002) `Network Ties, Reputation and the Financing of New Ventures', Management Science48: 364—81.
76.
Spence, A.M. (1974) Market Signaling. Cambridge, MA: Harvard University Press.
77.
Stiglitz, J.E. (2000) `The Contributions of the Economics of Information to Twentieth Century Economics', Quarterly Journal of Economics115: 1441—78.
78.
Timmons, J.A. and Bygrave, W.D. (1986) `Venture Capital's Role in Financing Innovation for Economic Growth', Journal of Business Venturing1: 161—76.
79.
Tinic, S. (1988) `Anatomy of Initial Public Offerings of Common Stock', Journal of Finance43: 789—822.
80.
Vermeulen, F. and Barkema, H. (2001) `Learning Through Acquisitions', Academy of Management Journal44: 457—76.
81.
Villalonga, B. (2004) `Intangibles Resources, Tobin's Q and the Sustainability of Performance Differences', Journal of Economic Behavior and Organization54: 205—30.
82.
Villalonga, B. and McGahan, A. (2005) `The Choice Among Acquisitions, Alliances and Divestitures' , Strategic Management Journal26: 1183—208.
83.
Welch, I. (1989) `Seasoned Offerings, Imitation Costs and the Underpricing of Initial Public Offerings', Journal of Finance44: 421—49.
84.
Zollo, M. and Singh, H. (2004) `Deliberate Learning in Corporate Acquisitions: Post-acquisition Strategies and Integration Capability in US Bank Mergers' , Strategic Management Journal25: 1233—1256.
