Acquisition of IPO Firms: Cash-Flow-based Measures of Operating Inefficiency

This study examines the impact of accounting-based measures of operating inefficiency on the aftermarket acquisition of an IPO. Prior IPO studies have not incorporated efficiency measures. Utilizing survival analysis, we find strong empirical evidence that the probability of acquisition is increased significantly when the IPO is inefficiently managed, measured by lower ratios of cash flow from continuing operations. When we compare the cash flow measures to conventional accrual assessments of operating inefficiency, we find that the accrual measures are not significant, while the cash flow measures maintain their significance. Moreover, our findings support the “inefficient management rationale” for acquisition.