Signals in the Acquisition Market for Private Ventures: the Role of Signal Receivers Characteristics

Scholars agree that there are considerable information asymmetries in the acquisition market for privately held entrepreneurial ventures, that may inhibit the realization of value-creating acquisitions and depress target ventures’ acquisition valuation. Quality signals like target firms’ affiliation with venture capital investors (VCs), especially prominent ones, help reduce these negative effects. In this study, we argue that the effectiveness of this signal depends on the characteristics of signal receivers and increases with the number of prospective acquirers that are poorly informed about a focal target venture (i.e., those that operate in a different business as the one of the target venture and are located at great geographical distance from its premises). Our model shows that ventures affiliated with VC investors, especially highly reputable ones, are more likely than non-VC-backed ventures to be acquired by firms that are poorly informed about the focal target venture. Moreover, the positive effect of VC-backing on entrepreneurial ventures’ acquisition valuation is greater if there is a greater number of poorly informed prospective acquirers, while it is not influenced by the number of well-informed prospective acquirers. We investigate our claims on 1,310 European privately held entrepreneurial ventures that were acquired between 1998 and 2018. Results largely confirm our hypotheses.