1. A signaling theory of acquisition premiums: Evidence from IPO targets
Academy of Management Journal (2012)
Jeffrey Reuer
Tony W. Tong
Cheng-Wei Wu
National Taiwan University
University of Colorado-Boulder
University of Colorado- Boulder
Presented by W. Zhang
Updated by Ki-Jung Kim (Sep. 2018)

2. Motivation
Information asymmetries during acquisition of IPO firms -> IPO targets will capture less value in acquisitions if buyers discount their offer prices.
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 Determinants of acquisition premiums
managerial biases and organization learning (in management)
agency costs (in finance)
Both fields have devoted less attention to the role of target firms.
The authors complement these theories by joining the literature with signaling theory and by focusing on target-side determinants of acquisition premiums.

4. Signaling Theory
Spence (1974) and information economics examined the implications of asymmetric information and adverse selection.
Spence focused on the process of hiring of employees
The most productive recruits will not be offered higher wages, if employers cannot efficiently ascertain productivity.
Although productive employees might want to reveal productivity information, they encounter credibility problems.
As a result, educational achievement can be a valuable signal.
Studies in other market settings suggest that the presence of signals or other remedial mechanisms can promote exchanges and reduce offer price discounting.

5. Research Hypotheses
Signals can be useful to help a seller to obtain a higher acquisition premium.
If IPO targets can rely on signals, an acquirer is more likely to proceed with a deal.
A potential acquirer is less likely to discount their offer price because the signals reduces uncertainty.
Three types of inter-organizational relationships : Relationships with (1) prominent underwriters, (2) venture capitalists (VC), and (3) alliance partners
These relationships signal the quality of IPO firms.

6. 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.

7. Hypotheses
The value of signals is also a function of the level of information asymmetry faced by an acquirer.
When purchasing a target in its own business, an acquirer is generally more familiar with the sellers.
Such familiarity enhances the ability to judge the target’s claims and evaluate the target effectively.
In contrast, when an acquirer purchases a target in different industry, the information asymmetries become greater.
The acquirer is more likely to lack the capacity to efficiently evaluate the seller.

8. 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.

9. Hypotheses
Deals between foreign acquirers and domestic targets involve more information asymmetry problems.
Firms investing abroad face a liability of foreignness, or greater costs of doing business than their domestic counterparts face.
Differences in national institutional environments increase the information asymmetry between firms situated in different countries.

10. Hypotheses
Hypothesis 5a. 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 foreign countries.
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.

11. 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

12. Measures Dependent variable
Acquisition premium: percentage difference between a purchase price and IPO target’s value four weeks prior the announcement of the acquisition.
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
Prominent alliance partners: log (1 + number of prominent alliance partners)

13. Measures Variables for contingent effects of signals h
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

14. 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

15. Results

16. Results

17. Results

18. Discussion
This study..
advances M&A research by developing a signaling theory of acquisition premiums.
complements prior M&A research in management and finance with arguments and findings that target firms’ signals can positively affect the acquisition premiums.
contributes to recent research on the signaling benefits of firms’ interorganizational relationships, by Identifying that the benefits depend on the informational environment of signals.