Exit Choice Under Uncertainty: Renewable Versus Non-renewable Energy Firms

Early stage investors in startups typically choose to exit from their investments through initial public offerings (IPOs) or acquisitions, often because they need access to more capital for growth. The need for capital to scale up is especially true for startups in the energy sector, where the technology tends to be capital intensive and front loaded. Often, such startups take the IPO route. Previous literature in the area of IPOs and acquisitions focuses on the rationale behind firms’ preferred exit mechanisms. Bayar and Chemmanur (2012), for example, find that in industries without a dominant market player, more capital intensive firms and firms which are harder to value, typically prefer IPOs, and that valuation premia for IPOs disappear after controlling for these attributes. In this paper, we examine the difference in performance, exit patterns and value obtained between renewable and non-renewable energy firms. Further, we study whether firms benefit from the presence of funding, by including an indicator variable for the presence of funding and assessing its impact on their performance. The renewable energy industry, being a riskier (due to uncertainty about future revenues) and, at present, more favourable category compared to the non-renewable energy industry, offers us a setting to compare exit propensities of firms towards IPOs against acquisitions. We find a plenitude of interesting results: first, we find that in the energy sector, smaller firms are more likely to go public than get acquired. Further, firms in the renewable energy sector tend to go for an IPO rather than get acquired, which is consistent with the findings of (Bayar and Chemmanur in J Financ Quantit Anal 46:1755–1793, 2011). Third, acquisitions tend to help companies in the energy sector to close the performance gap with firms which go for an IPO. We contribute to the literature by studying whether early stage investors in the energy sector obtain more value through IPOs or acquisitions across the industry, and whether the riskiness of the category of the firm within the same industry impacts exit choice. This would help policymakers understand the importance of funding and Private Equity/Venture Capital backing in improving the value of the firm.