IPO relative difficulty, M&A option and size effect

Die Wan, Teng Yang and Xiaoguang Yang

Journal of Asian Economics, 2021, vol. 76, issue C

Abstract: Size effect in the Chinese stock market is huge from 2012 to 2017. We empirically identify a driving force behind the effect: M&A option caused by IPO and M&A policies changes. We show that the M&A frequency increases and the acquirers' market value deceases as the IPO relative difficulty rises, small firm premium is positively related to both IPO relative difficulty and M&A frequency, and among the listed firms that have stronger tendency to merge or acquire a private firm, size effect is significantly larger. These results hold when controlling reverse merger probability. In sum, we reveal a new mechanism: Compared with a large public firm, a small one is more likely to acquire a private firm with discount since both the acquired and the acquirer benefit more, so the stock price of a small firm contains a larger part of M&A option. This option value increases as IPO relative difficulty rises.

Keywords: Small firm premium; IPO; Merger and acquisition; Financing difficulty (search for similar items in EconPapers)
JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:76:y:2021:i:c:s1049007821000798

DOI: 10.1016/j.asieco.2021.101350

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