Determinants of IPO-firms’ merger appetite

Marco Bade ()
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Marco Bade: Berlin Institute of Technology, Chair of Finance and Investment

Review of Managerial Science, 2020, vol. 14, issue 1, No 8, 193-219

Abstract: Abstract This paper proposes a model with mutual feedback effects to investigate IPO-firms’ information-related objectives to engage in post-IPO mergers in an economy with informational synergies. The model demonstrates that the probability of a post-IPO merger (merger appetite) positively affects the information production by a speculator in the financial market. This has two opposite effects on the IPO-firm’s value. (1) It exacerbates after-market illiquidity and thus increases underpricing in the primary market. (2) Simultaneously, it enhances expected net present value (NPV) of investment opportunities via two information-related channels: direct channel due to informational synergies among firms, indirect channel via the speculator’s information production. The model predicts a tradeoff between underpricing and expected NPV of investment opportunities determining the merger appetite of IPO-firms. In addition, the model endogenizes the merger price the IPO-firm expects to pay to shareholders of a private firm. It is demonstrated that the described tradeoff and the mutual feedback effects also determine the expected merger price.

Keywords: M&A; Going public; Underpricing; Information production; Feedback effects; Merger price (search for similar items in EconPapers)
JEL-codes: G1 G32 G34 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11846-018-0291-2

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