TITLE:
Effect of Book Building and Auctions on the Exit Choice between IPO and Acquisition
AUTHORS:
Rohan Chinchwadkar, Rama Seth
KEYWORDS:
Initial Public Offerings, Acquisitions, Private Equity, Game Theory, Signalling Games, Perfect Bayesian Equilibrium
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.4,
August
4,
2015
ABSTRACT: The
choice of exit mechanism between IPOs and acquisitions is an important decision
faced by entrepreneurs and private equity investors. Although the decision to
go public has been studied extensively, a firm’s choice between IPO and
acquisition remains relatively unexplored. In this paper, we extend the
existing literature by studying the effect of the type of IPO process on the
decision. We introduce the two IPO methods: book building and auctions, and
show how the parameters of the IPO methods affect the choice between IPOs and
acquisitions. We show that for both the IPO methods, the probability of
choosing IPOs decrease when cost to investors for acquiring information increases
and fixed entry cost for investors increases. In the case of book building, we
show that the probability of choosing IPOs decreases when the number of
informed investors in the road-show increases. In the case of auctions, we show
that the probability of choosing IPOs decreases when the certainty of the
auction being successful decreases and the number of potential bidders
increases. We analyse these extensions in two cases: when the firm is
controlled by the entrepreneur and when the firm is controlled by the private
equity investor. We also discuss important empirical implications which arise
out of our theoretical model.