Academic journal article Journal of Business Strategies

Board Characteristics and the Acquisition of Newly Public Firms

Academic journal article Journal of Business Strategies

Board Characteristics and the Acquisition of Newly Public Firms

Article excerpt

INTRODUCTION

Scholarly attention to the acquisition of firms that have completed their initial public offerings (IPOs), sometimes referred to as public dual-tracking, represents a growing area of interest to scholars in finance, management, and entrepreneurship (Brau, Sutton, & Hatch, 2010; Ragozzino & Reuer, 2007b). This attention is due, at least in part, to the relative frequency with which newly public firms (Arend, Patel, & Park, 2014; Garg, Li, & Shaw, 2018) are acquired by other firms upon completion of their IPOs (Brau, Francis, & Kohers, 2003; Pagano, Panetta, & Zingales, 1998) as well as the potential for such acquisitions to create wealth for newly public firm owners (Reuer, Tong, & Wu, 2012). Indeed, research on this topic suggests that this type of 'public-dual tracking', where firms go public and are then acquired by another firm thereafter, represents a potentially lucrative form of entrepreneurial exit for founders and shareholders (Field & Karpoff, 2002; Zingales, 1995).

While the acquisition of a newly public firm provides founders and shareholders with an opportunity to create financial wealth (Brau et al., 2010), substantial challenges to the realization of such gains exist. For example, the relatively short track records of newly public firms serve to increase uncertainty surrounding their long-term viability (Certo, 2003; Fischer & Pollock, 2004). Difficulties associated with the valuation of newly public firm resources and growth prospects serve to further exacerbate the uncertainty faced by potential acquirers of newly public firms (Cooper, Woo, & Dunkelberg, 1988; Heeley, Matusik, & Jain, 2007). These challenges give rise to potentially high degrees of information asymmetry between newly public firms and their prospective acquirers, exposing potential acquirers to the hazards of adverse selection and moral hazard (Ragozzino & Reuer, 2007b; Reuer & Ragozzino, 2008). As a consequence of these challenges, prospective acquirers of newly public firms may choose not to proceed with what might otherwise represent seemingly attractive acquisitions (Ragozzino, 2016).

Relatively little is known about what factors lead firms to be acquired after their IPOs. Extant research often draws upon the logic of signaling theory (Arrow, 1973; Spence, 1981), to argue that when faced with the uncertainty presented by evaluating newly public firms as potential acquisition targets, prospective acquirers of newly public firms screen potential acquisition targets based upon indicators of firm viability (Ragozzino & Reuer, 2007a, 2007b). Tests of the insights provided by signaling theory have proven fruitful in furthering our understanding of which firm characteristics are salient to prospective acquirers of newly public firms. For example, research suggests that affiliations with venture capitalists, prestigious underwriters, as well as IPO performance represent signals of newly public firm quality that prospective acquirers value (Ragozzino & Reuer, 2007a).

While the focus of research on the role played by such external affiliations and endorsements has contributed to our understanding of the evaluative processes undertaken by potential acquirers of newly public firms, ample room exists for extending research in this vein. For example, relatively little is known about the role played by boards of directors in shaping the likelihood that newly public firms will be acquired. In conducting this study we extend extant research in multiple ways. First, we shift the focus of research on the acquisition of newly public firms from the effects of external affiliations and endorsements towards indicators of internal agency conditions occurring within newly public firms as reflected by their boards of directors. While the findings of management research identify the role of external endorsements such as venture capital (VC) backing, underwriter reputation, and IPO performance in addressing the information asymmetry problems faced by prospective acquirers of newly public firms, (e. …

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