Initial public offerings and the acquisition of entrepreneurial firms

Abstract

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.