What drives the valuation premium in IPOs versus acquisitions? An empirical analysis

► IPO valuation premium puzzle: A situation where many private firms choose to be acquired rather than to go public at higher valuations. ► This paper develops the first empirical analysis of the IPO valuation premium puzzle. ► Also tests several new hypotheses regarding a private firm's choice between IPOs and acquisitions. ► We show that IPO valuation premia disappear for larger VC backed firms after controlling for various observable factors affecting a firm's propensity to choose IPOs over acquisition. ► After controlling for the long-run component of the expected payoff to firm insiders from an IPO exit, the IPO valuation premium vanishes even for larger non-VC backed firms.