Who is willing to be rich and king? Founder-CEOs’ IPO and M&A intentions

ABSTRACT

Founder-chief executive officers (founder-CEOs) have several reasons for starting businesses but often struggle to pursue shareholder wealth and firm control. By conducting a survey of start-up firms in the manufacturing and information service sectors in Japan, we examine founder-CEOs’ initial public offering (IPO) and mergers and acquisitions (M&A) intentions. We propose an analytical approach from the perspective of shareholder wealth and firm control, and estimate the determinants of founder-CEOs’ IPO and M&A intentions. Our findings indicate that start-up firms with innovation resources, including new products and service and intellectual property, are more likely to seek IPOs. In addition, growth-oriented firms and founder-CEOs with prior entrepreneurial experience are more likely to seek IPOs and M&A. Moreover, younger founder-CEOs are more likely to have IPOs and M&A intentions. Furthermore, this study identifies founder-CEOs’ rich and king positions by providing the similarities and differences in the determinants of IPO and M&A intentions.

KEYWORDS:

• Founder-CEO
• IPO and M&A
• rich and king

Acknowledgments

We are grateful to the participants at the workshop held in Kochi for their valuable and constructive suggestions. We thank Yoshihiro Eshima and Kenta Ikeuchi for their insightful comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ However, M&A is not always recognized as a successful exit, especially in countries, such as Japan, where private equity markets are not fully developed (Coad & Kato, 2021; Honjo & Kurihara, 2023; Honjo & Nagaoka, 2018). As M&A are not prevalent in Japan, IPO intentions tend to be examined (Honjo, 2001).

² As IPOs are more vulnerable to market conditions than M&A, market timing factors affect the choice between IPOs and M&A (Bancel & Mittoo, 2009; Brau et al., 2003).

³ A few studies have highlighted IPO or M&A implementation in the early stages of firms (Beckman & Burton, 2008; Grilli, 2011; Honjo, 2021b).

⁴ Brau and Fawcett (2006) provided evidence on how managerial attitudes differ according to the IPO status: (i) withdrawn, (ii) successful, and (iii) not tried, based on univariate analyses, although they did not estimate regression models. DeTienne and Chirico (2013) provided explanations for a sellout strategy in family firms, and Hsu et al. (2016) examined exit intentions (quitting a business) by targeting family businesses.

⁵ DeTienne (2010) argued that sellout (exit) strategies, such as IPO and M&A, occur through the dissolution of the organization, according to the threshold theory proposed by Gimeno et al. (1997). This indicates that organizational exit is determined by of economic performance and the entrepreneur’s threshold.

⁶ Generally, start-up firms are unwilling to answer the questionnaire survey. Therefore, the TSR asked for their replies from firms that had not yet returned answerers. By doing so, we made an effort to avoid selection bias due to the limitation to firms that aggressively answered the survey. However, the response rate in this study may be slightly lower than in previous studies. For, instance, Graham et al. (2013) had a response rate of 11% when targeting CEOs including large firms. Honjo et al. (2014), who surveyed Japanese firms, had a response rate of 11%. Our survey target firms founded within two years and survey founder-CEOs’ strategies and intentions, which may cause a low response rate, probably because younger firms have a higher closure rate and cannot afford to undertake questionnaire surveys.

⁷ Taking into account the case of multiple founders, in our survey, we asked firms with multiple founders to choose one founder and answer his or her personal attributes.

⁸ We tested whether the regional distribution in our sample differs from that in the population using data (new firms for the year 2019) from Economic Census for Business Activity compiled by the Ministry of Internal Affairs and Communications. However, the test statistics rejected the null hypothesis that the regional distribution in our sample does not differ from that in the population. Our survey inquired about growth orientation, such as IPO and M&A intentions, and growth-oriented firms may tend to be located in urban areas. Therefore, a regional distribution bias may be unavoidable in this survey. To control for differences between regions using regional dummies, we also estimated the regression equations including eight regional dummies: Hokkaido, Tohoku, Kanto, Koshinetsu, Tokai, Kinki, Chugoku, Shikoku, and Kyushu—Okinawa (reference). We found similar results to those shown in Table 3. Furthermore, we compared the characteristics of respondents and nonrespondents to identify potential nonresponse bias, and found no significant differences in incorporation years (firm age) between respondents and nonrespondents. However, we found significant differences in firm size, measured by the logarithm of paid-in capital plus one. Despite these differences, it is unlikely that the firm characteristics have a significant impact on founder-CEOs’ intentions for IPOs and M&A.

⁹ Soininen et al. (2012) measured growth orientation using questions based on a Likert scale (1: completely disagree; 5: completely agree). following the questions: (i) “our purpose is to grow without compromising on profitability,” (ii) “we intend to expand our business to new customer segments,” and (iii) “we intend to expand our product/service offerings.” However, we simply measure growth orientation using the question of whether the firm seeks to expand its business or not.

¹⁰ Generally, only a few firms are initially financed by VC and angel investors in Japan (Honjo et al., 2022). In our sample, the proportion of firms financed by VC is less than 2%; thus, we merge VC and angel investors into private equity capital. In addition, as already mentioned, some scholars have examined the impact of VC on entrepreneurial exits (Cumming & Johan, 2008). Thus, we also estimate the determinants of IPO and M&A intentions using the sample of firms not financed by VC and angel investors. We find that our results are essentially unchanged, whereas the coefficients of NEW_PROD and INT_PROP for IPO intentions are slightly lowered.

¹¹ Albert and DeTienne (2016) measured human resources by the size of founding team members. We also estimate the coefficients of the logarithm of the number of founding team members instead of SOLO but do not obtain any significant results.

¹² Moreover, equity crowdfunding is expected to promote technology-driven entrepreneurship (Herve & Schwienbacher, 2018). For more discussion on the role of equity crowdfunding as new financial alternatives, see, for example, Bruton et al. (2015), Coakley and Lazos (2021).

¹³ We also estimate the regression equations of IPO and M&A intentions, respectively, using a multinomial logit model when the dependent variable takes a value of one or two for interests or plans. Specifically, we find that while the development of new products and services is simply associated with IPO interests, intellectual property is associated with IPO plans. This suggests that intellectual property allows firms to trade firm-specific intangible assets, and such tradable assets are more likely to be associated with a viable IPO strategy. Moreover, while growth-oriented firms and founder-CEOs with prior entrepreneurial experience plan an IPO, they are interested in M&A, rather than planning it.

¹⁴ We can also define the dependent variable that takes a value of one for both IPO and M&A plans. However, we do not use this definition because, as shown in Table 1, the number of observations that take a value of one is very small (only seven firms).

Additional information

Funding

This study was supported by a Grant-in-Aid for Scientific Research (B) [Number: 21H00719] from the Japan Society for the Promotion of Science.