YE CAI: Board Connections and M&A Transactions (Under the direction of Merih Sevilir and Anil Shivdasani) We examine M&A transactions between firms with current board connections and show that acquirers obtain significantly higher announcement returns in such transactions. Acquirer announcement returns in transactions with a first-degree board connection where the acquirer and the target share a common director are 2.46% greater than those in nonconnected transactions. Similarly, acquirer announcement returns in transactions with a second-degree board connection where one director from the acquirer and one director from the target serve on the board of a third firm are 1.62% greater than those in non-connected transactions. Our results suggest that first-degree board connections benefit acquirers by allowing them to acquire the target at a lower takeover premium. Second-degree board connections, on the other hand, benefit acquirers by resulting in greater value creation from the deal, as evidenced by greater combined acquirer and target announcement returns and better post-merger operating performance in such deals. v

YE CAI: Board Connections and M&A Transactions (Under the direction of Merih Sevilir and Anil Shivdasani) We examine M&A transactions between firms with current board connections and show that acquirers obtain significantly higher announcement returns in such transactions. Acquirer announcement returns in transactions with a first-degree board connection where the acquirer and the target share a common director are 2.46% greater than those in nonconnected transactions. Similarly, acquirer announcement returns in transactions with a second-degree board connection where one director from the acquirer and one director from the target serve on the board of a third firm are 1.62% greater than those in non-connected transactions. Our results suggest that first-degree board connections benefit acquirers by allowing them to acquire the target at a lower takeover premium. Second-degree board connections, on the other hand, benefit acquirers by resulting in greater value creation from the deal, as evidenced by greater combined acquirer and target announcement returns and better post-merger operating performance in such deals. v

Newly public firms make acquisitions at a torrid pace. Their large acquisition appetite reflects the concentration of IPOs in M&A intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms' acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency that is used to raise capital for both cash and stock financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets and acquisitions are at least as important as R&D and CAPEX for their growth. The pattern of acquisition activity following an IPO is important in explaining the evolution of ownership structure of newly public firms. JEL Codes: G32, G34Address Correspondence to Anil Shivdasani * We thank Uli Hege, Chris James, Michelle Lowry, Henri Servaes, and participants at the 2008 AFA meetings, the RICAFE Conference, the ESSEC Private Equity Conference, the 2007 Jackson Hole Finance Conference, and at University of North Carolina for helpful comments. 2 IntroductionWhy do firms choose to go public? An IPO is one of the most consequential events in the life of a company, but our understanding of this decision remains incomplete. Existing theories offer several insights for why firms decide to go public. In theory, an IPO creates liquidity for the firm's shares, provides an infusion of capital to fund growth, allows insiders to cash out, provides cheaper and ongoing access to capital, facilitates the sale of the company, gives founders the ability to diversify their risk, allows venture capitalists and other early stage investors to exit their investment, and increases the transparency of the firm by subjecting it to capital market discipline. Weisbach (2008) show that financing of capital expenditures and the desire to benefit from potential overvaluation are motives for seasoned equity offerings (SEOs) and IPOs.We study a relatively unexplored motive for IPOs -the desire to make acquisitions. We conduct a number of tests to provide some insight on the determinants of post-IPO M&A activity. Our first observation is that the M&A activity of IPO firms is strongly linked to the amount of M&A activity within their industry. In other words, IPOs tend to occur in industries with high M&Aactivity. Yet, industry clustering of IPOs and M&A does not fully explain the acquisition appetite of IPO firms -by most benchmarks, IPO firms are more prolific acquirers than the mature public firms within their industry.We consider three potential avenues by which an IPO can facilitate future M&A activity and explore whether these explain the acquisition volumes by IPO firms. An IPO can allow companies to pursue M&A by providing an infusion of cash, by opening the possibility of paying for an acquisition with overvalued stock, and by resolving the uncertainty about the pre-IPO valuation of the firm and the 1 In other work, Brown, Dittmar...

Newly public firms make acquisitions at a torrid pace. Their large acquisition appetite reflects the concentration of IPOs in M&A intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms' acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency that is used to raise capital for both cash and stock financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets and acquisitions are at least as important as R&D and CAPEX for their growth. The pattern of acquisition activity following an IPO is important in explaining the evolution of ownership structure of newly public firms.

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