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Start Date

16-8-2018 12:00 AM

Description

According to prior research, entrepreneurial IT firms (EIT firms) create many novel innovations in the information technology (IT) industry and are often acquired by larger IT firms to supplement their own innovation endeavors. However, the size and relative obscurity of EIT firms creates ‘information gaps’ that makes it difficult for EIT firms to effectively communicating their quality to potential acquirers resulting in the application of acquisition discounts during the purchase. In this paper, we discuss two ‘information gaps’ i.e., incognito information gap, and firm value equivocality gap and suggest that by communicating signals to bridge these ‘information gaps’ EIT firms can avoid acquisition discounts and procure a higher price when they are acquired. Using an empirical analysis of 239 acquisitions with EIT firm targets, we found that the acquisition prices of EIT firms that did not communicate signals to reduce the ‘incognito’ and ‘firm value equivocality’ gaps were discounted.

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Aug 16th, 12:00 AM

Entrepreneurial IT Firm Value Signaling and the Application of Acquisition Discounts

According to prior research, entrepreneurial IT firms (EIT firms) create many novel innovations in the information technology (IT) industry and are often acquired by larger IT firms to supplement their own innovation endeavors. However, the size and relative obscurity of EIT firms creates ‘information gaps’ that makes it difficult for EIT firms to effectively communicating their quality to potential acquirers resulting in the application of acquisition discounts during the purchase. In this paper, we discuss two ‘information gaps’ i.e., incognito information gap, and firm value equivocality gap and suggest that by communicating signals to bridge these ‘information gaps’ EIT firms can avoid acquisition discounts and procure a higher price when they are acquired. Using an empirical analysis of 239 acquisitions with EIT firm targets, we found that the acquisition prices of EIT firms that did not communicate signals to reduce the ‘incognito’ and ‘firm value equivocality’ gaps were discounted.