Information Frictions in the Market for Startup Acquisitions

Abstract

We document and quantify herding effects in the market for startup acquisitions, examining international acquisitions. Analyzing a sample of 5,725 Israeli venture-backed startups, we implement a machine learning algorithm to generate dyads of technologically similar companies. Difference-in-differences and instrumental variable models show that the initial acquisition of a startup by a foreign company increases the chances that another technologically related startup is subsequently acquired by a foreign company by 61%. Instead, the effect is null when an initial acquisition is enacted by an Israeli firm. Consistent with informational herding, we show that the reaction of foreign firms intensifies with the prominence of an initial acquisition. The less informed foreign acquirers respond more strongly to prominent acquisitions than to non-prominent acquisitions of Israeli startups, relative to the better informed. We further show that Israeli firms minimally react to the foreign acquisition of Israeli startups. The analysis of VC reactions and startup sales prices confirms an increase in the foreign demand for Israeli startups, following an initial acquisition.