1. A signaling theory of acquisition premiums: Evidence from IPO targets
Academy of Management Journal (2012)
Jeffrey Reuer
Tony W. Tong
Cheng-Wei Wu
University of Colorado-Boulder
University of Colorado- Boulder
University of Hong Kong
Presented by W. Zhang

2. Motivation Information asymmetries during acquisition of IPO firms
To join literatures on IPOs and acquisition premiums with signaling theory
Research question: What particular signals about IPO firms will have an impact on the premiums they obtain when selling their companies?

3. Background theory Acquisition premiums determinants:
Value creation potential
Managerial biases and organizational learning
Agency costs
Signaling theory: implications of asymmetric information and adverse selection. Spence (1974) seminal work on hiring.

4. Hypotheses
Hypothesis 1. The acquisition premium received by an IPO target is positively related to the reputation of its investment bank.
Hypothesis 2. The acquisition premium received by IPO targets is greater for targets backed by prominent VCs.
Hypothesis 3. The acquisition premium received by an IPO target is positively related to the number of alliances it has formed with prominent partners.

5. Hypotheses
Hypothesis 4a. Affiliations with reputable investment banks are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in industries with different knowledge requirements.
Hypothesis 4b. Affiliations with prominent VCs are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in industries with different knowledge requirements.
Hypothesis 4c. Alliances with prominent partners are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in industries with different knowledge requirements.

6. Hypotheses
Hypothesis 5b. Affiliations with prominent VCs are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in foreign countries.
Hypothesis 5c. Alliances with prominent partners are particularly beneficial to the acquisition premiums that IPO targets receive when they sell their companies to acquirers based in foreign countries.

7. Data SDC database, M&A data, Compustat and CRSP
Newly public firms ( ), excluding REITs, mutual funds, unit offerings, spin-offs, LBOs and financial services sector.
IPO firms that where acquired within five years of going public
Deals with a transaction value greater than $50 million
308 deals involving 263 acquires

8. Measures Dependent variable
Acquisition premium: percentage difference between a purchase price and IPO target’s value four weeks prior the announcement of the acquisition.

9. Measures Independent variables
Investment bank reputation: ranking index by Carter and Manaster (1990)
Venture capitalist prominence: dummy variable. 1 if the number of IPOs backed by the VC where above the median, 0 otherwise

10. Measures Independent variables
Prominent alliance partners: log (1 + number of prominent alliance partners) G
Cross border: dummy variable, 1 if acquirer was a foreign, 0 otherwise.
Proportion of employees in occupation k in an acquirer’s industry
Proportion of employees in occupation k in an target’s industry

11. Measures Controls Acquire M&A experience Firm size Deal size
Firm Tobin’s q
Underpricing
Analysis coverage
Time since IPO
Managerial ownership
Inside directors
Blockholdings
Acquire M&A experience
Deal size
Tender offer
Stock offer
Competing bidders
Percentage acquired
High tech industry

12. Results

13. Results

14. Results

15. Supplementary analysis
Sample selection bias
Endogeneity
Decay of signals
Alternative measures of signals and acquisition premiums

16. Discussion
Target firms’ signals can positively affect the acquisition premiums they receive
Inter-organizational relationships with prominent organizations confer benefits
These benefits are greater when IPO firms sell their companies in different industries.