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Delaware Reincorporation and the Double-Exit Puzzle: Evidence from Post-Initial Public Offering Acquisitions

Author

Listed:
  • Yang Xu

    (Calamos Investment LLC, Naperville, IL 60563, USA)

  • Vincent Jia

    (College of Social Science, University of California, Los Angeles, CA 90095, USA)

  • Xinze Qian

    (Stuart School of Business, Illinois Institute of Technology, Chicago, IL 60661, USA)

  • Haizhi Wang

    (Stuart School of Business, Illinois Institute of Technology, Chicago, IL 60661, USA)

  • Xiaotian Zhang

    (Department of Finance, School of Economics and Business Administration, Saint Mary’s College of California, Moraga, CA 94575, USA)

Abstract

Initial public offerings and mergers and acquisitions represent important opportunities for investors to exit and harvest their entrepreneurial success. Some firms are acquired shortly after their initial public offerings. This exit strategy is known as a double exit. In addition, issuing firms may choose to reincorporate in Delaware during their IPOs. In this study, we use hand-collected data from 1993 to 2020 to investigate whether and to what extent Delaware reincorporation may affect the M&As in the post-IPO stage. We use a Cox proportional hazard model to test the relation between Delaware reincorporation and the likelihood of being acquired for our sample IPOs. Recognizing that Delaware reincorporation is not a random decision, we adopt a Heckman switching regression method to estimate the relation between Delaware reincorporation and takeover premiums and announcement returns. We report that IPO firms choosing to reincorporate in Delaware experience a higher likelihood of being acquired compared to those IPO firms choosing to remain incorporated in their home states. We further document that IPO firms choosing to reincorporate in Delaware receive lower premiums in acquisitions, and experience lower abnormal returns on announcements.

Suggested Citation

  • Yang Xu & Vincent Jia & Xinze Qian & Haizhi Wang & Xiaotian Zhang, 2024. "Delaware Reincorporation and the Double-Exit Puzzle: Evidence from Post-Initial Public Offering Acquisitions," IJFS, MDPI, vol. 12(2), pages 1-15, April.
    • Handle: RePEc:gam:jijfss:v:12:y:2024:i:2:p:39-:d:1383568
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    References listed on IDEAS

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    1. Adam B. Badawi & Daniel L. Chen, 2017. "The Shareholder Wealth Effects of Delaware Litigation," American Law and Economics Review, American Law and Economics Association, vol. 19(2), pages 287-326.
    2. Johnson, William C. & Karpoff, Jonathan M. & Yi, Sangho, 2015. "The bonding hypothesis of takeover defenses: Evidence from IPO firms," Journal of Financial Economics, Elsevier, vol. 117(2), pages 307-332.
    3. Steven D. Dolvin & Bradford D. Jordan, 2008. "Underpricing, Overhang, and the Cost of Going Public to Preexisting Shareholders," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(3‐4), pages 434-458, April.
    4. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December.
    5. Schultz, Paul & Zaman, Mir, 2001. "Do the individuals closest to internet firms believe they are overvalued," Journal of Financial Economics, Elsevier, vol. 59(3), pages 347-381, March.
    6. Boeh, Kevin K. & Dunbar, Craig G., 2021. "Raising capital after IPO withdrawal," Journal of Corporate Finance, Elsevier, vol. 69(C).
    7. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2002. "The rationales underlying reincorporation and implications for Canadian corporations," International Review of Law and Economics, Elsevier, vol. 22(3), pages 277-330, September.
    8. Kellner, Tobias, 2024. "The impact of M&A announcements on stock returns in the European Union," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 843-862.
    9. James Heckman, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    10. Peterson, Pamela P, 1988. "Reincorporation: Motives and Shareholder Wealth," The Financial Review, Eastern Finance Association, vol. 23(2), pages 151-160, May.
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    Cited by:

    1. Cumming, Douglas J. & Johan, Sofia & Reardon, Robert S., 2025. "Institutional quality and success in U.S. equity crowdfunding," Research Policy, Elsevier, vol. 54(1).

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