The impact of industry IPOs on acquisitions of new ventures: An information spillovers perspective

Abstract

The announcements of initial public offerings (IPOs) in an industry can convey to potential acquirers information about the growth prospects of the rivals of ventures undertaking IPOs, thereby increasing their likelihood of being acquired. We investigate several information diffusion mechanisms to examine how information conveyed by industry IPOs shape such acquisitions. We also develop a contingency perspective on how the value of such information spillovers will vary across acquirers. Our empirical evidence indicates that information in the IPO market channeled via media coverage, analyst coverage, and IPO underpricing raises an acquirer's likelihood of acquiring a private venture. Thus, the information intermediated as a consequence of IPOs relaxes the constraints of an acquirer's information environment, and this is particularly the case for diversifying acquirers.