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      IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists

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      Journal of Financial and Quantitative Analysis
      Cambridge University Press (CUP)

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          Abstract

          We analyze a private firm’s choice of exit mechanism between initial public offerings (IPOs) and acquisitions, and we provide a resolution to the “IPO valuation premium puzzle.” The private firm is run by an entrepreneur and a venture capitalist (VC) (insiders) who desire to exit partially from the firm. A crucial factor driving their exit choice is competition in the product market: While a stand-alone firm has to fend for itself after going public, an acquirer is able to provide considerable support to the firm in product market competition. A second factor is the difference in information asymmetry characterizing the two exit mechanisms. Finally, the private benefits of control accruing to the entrepreneur post-exit and the bargaining power of outside investors versus firm insiders are also different across the two mechanisms. We analyze two situations: the first, where the entrepreneur can make the exit choice alone (independent of the VC), and the second, where the entrepreneur can make the exit choice only with the concurrence of the VC. We derive a number of testable implications regarding insiders’ exit choice between IPOs and acquisitions and about the IPO valuation premium puzzle.

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          Most cited references25

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          Informational Asymmetries, Financial Structure, and Financial Intermediation

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            Signaling Games and Stable Equilibria

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              A Review of IPO Activity, Pricing, and Allocations

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                Author and article information

                Journal
                Journal of Financial and Quantitative Analysis
                J. Financ. Quant. Anal.
                Cambridge University Press (CUP)
                0022-1090
                1756-6916
                December 2011
                June 01 2011
                December 2011
                : 46
                : 6
                : 1755-1793
                Article
                10.1017/S0022109011000408
                9bde0bb0-1f7b-4b38-b67f-f38a49aa3932
                © 2011

                https://www.cambridge.org/core/terms

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