Initial public offering over-issuance and a firm's acquisition behavior: Evidence from China

We analyze the relation between initial public offering (IPO) over-issuance and a firm's subsequent acquisition decisions. We find that newly listed firms are more likely to engage in merge & acquisitions (M&As) and initiate more and larger-sized M&As after raising more excess cash in their IPO. Additionally, this IPO over-issuance is negatively associated with the newly listed firm's post-acquisition stock performance. Moreover, Type I (principal-agent) and Type II (principal-principal) agency problems explain those relations. The negative relation between IPO over-issuance and stock performance is exacerbated for companies that have made large and industry-diversifying M&As. Further analyses reveal that acquirers who raised more excess cash in their IPO prefer to pay for their M&As entirely in cash.