Initial public offering over‐issuance and a firm's acquisition behavior: Evidence from <scp>China</scp>

Abstract 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 &amp; acquisitions (M&amp;As) and initiate more and larger‐sized M&amp;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&amp;As. Further analyses reveal that acquirers who raised more excess cash in their IPO prefer to pay for their M&amp;As entirely in cash.