Firm value and financial constraints: Evidence from private firm sellouts and reverse mergers

Essay 1: Financial Constraints and Firm Value: Evidence From Sales of Private Firms. Abstract: I examine sales of private firms to better understand the effect of relaxing financial constraints on firm value. My empirical tests exploit an exogenous shock to financial constraints caused by interstate bank branching deregulation. On a sample of 557 sales of private firms to public acquirers, I find that relaxed financial constraints lead to a statistically significant increase of 7.3% in valuation multiples of private targets. I also find a significant increase in private target valuation multiples benchmarked to public target valuation multiples. These effects are more pronounced for firms in the sample with below median annual sales. Acquirer returns are negatively impacted when financial constraints on private targets are relaxed. The evidence supports the prediction that relaxing financial constraints allows private targets to substitute bank credit for some of the financing benefits provided by acquirers and bargain for a higher valuation.;Essay 2: Reverse Mergers as an Exit Mechanism for Private Firm Owners. Abstract: I examine reverse mergers (RMs) as an exit mechanism for private firm owners and compare RMs to both IPOs and sellouts to a public acquirer. I find evidence that information asymmetry and product market competition influence the choice among the three exit mechanisms. RM firms are significantly different from IPO firms along observable characteristics. Also, I find that RM firm owners have less wealth following the exit than firm owners of matched IPO firms. Together, this evidence suggests that an IPO is not a realistic option for the vast majority of RM firms. In contrast, RM firms are similar to sellout firms along observable characteristics and owners of RM firms receive the same, or greater, wealth as owners of comparable sellout firms. Thus, a sellout appears to be a viable alternative to a RM for many firms. I examine whether or not RMs generate positive synergy. I find that synergy is positive, on average, when synergy is calculated using valuations of private firms that are inferred from industry multiples of private-private takeovers. In contrast, I find that synergy is negative, on average, when synergy is calculated using private firm valuations produced by financial advisors to the public firm board of directors. The evidence leads me to conclude that financial advisors produce inflated valuations of private firms that mechanically drives down the estimate of synergy.