Author Abstract
We compare three potential mechanisms for alleviating the asymmetric information between the public acquirers and private venture capital-backed targets. First, because venture capitalists repeatedly sell their portfolio companies through acquisitions, venture capitalists may be able to certify the quality of the assets that an outside party is buying because they are "staking their reputation" on not selling overvalued assets. Second, personal and professional relationships may "bridge" the asymmetric information. This bridge may be particularly strong if both firms were financed by the same venture capital firm. Third, geographic proximity may also reduce the asymmetric information between a target and an acquiring firm. In a sample of 1,083 acquisitions of venture capital-backed private companies from 1976 and 2001, we find strong evidence that venture capital firms can form a bridge between acquiring firms and target firms that reduces asymmetric information associated with the transaction. Acquisition announcement period returns are more positive for acquisitions in which both the target and the acquirer are financed by the same venture capital firm. Similarly, we find that having a common investor increases both the likelihood that a transaction will be all stock as well as the fraction of stock in the overall acquisition payment. Targets that are concerned that the acquirer is potentially overvalued may be less willing to accept stock in an acquisition. A common investor can reduce this uncertainty about overvaluation. Hence, our evidence shows that the bridge runs in both directions. In addition, an acquisition is more likely to take place when there is a common venture capital investor linking the acquirer and the target. Finally, we show that long-run post-acquisition abnormal returns are higher for the acquiring firms when the target and the acquirer share a common venture capital investor.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: March 2008
- HBS Working Paper Number: 08-084
- Faculty Unit(s): Entrepreneurial Management; Finance