Does Asymmetric Information Affect the Premium in Mergers and Acquisitions?

Abstract

Abstract:Our objective is to test the influence of information asymmetry between potential buyers on the premium paid for an acquisition. We analyze mergers and acquisitions as English auctions with asymmetric information. The theory of dynamic auctions with private values predicts that more informed bidders should pay a lower price for an acquisition. We test that prediction with a sample of 1,026 acquisitions in the United States between 1990 and 2007. We hypothesize that blockholders of the target's shares are better informed than other bidders because they possess privileged information on the target. Information asymmetry between participants is shown to influence the premium paid. Blockholders pay a much lower conditional premium than do other buyers (around 70% lower). Tests also show that the characteristics of the target, specifically the runup, sales growth and size, affect the premium. The size of the target relative to the buyer, the choice of a public takeover bid and the hostility of the bid are also influential.

Testing for Information Asymmetry in the Mortgage Servicing Market

“…For robustness, we employ the nonparametric testing procedure of Chiappori and Salanié (2000). We also present a battery of parametric analyses to corroborate our results after controlling for observable risk characteristics, econometric misspecification errors, and endogeneity issues using the instrumental variable estimation procedure developed by Dionne et al (2009Dionne et al ( , 2015.…”

“…The parametric counterpart of the information asymmetry test consists primarily on scrutinizing the statistical link between the decision to switch the servicer and the likelihood of mortgage default. However, such methodology would potentially be problematic as it suffers from various issues notably endogeneity, econometric misspecification, and simultaneity (Dionne et al, 2009(Dionne et al, , 2015. To deal with, we employ three different parametric methods.…”

“…First, we use the twostage instrumental variable probit model in order to account for potential endogeneity. We also employ the two-step estimation procedure proposed by Dionne et al (2015) to account for econometric misspecification error and to correct for imposed linearity. Additionally, we employ the bivariate probit model in order to jointly estimate both binary outcomes in a system of simultaneous equations (Chiappori and Salanié, 2000).…”

“…FICO score -0.0034 *** -0.0033 *** -0.0034 *** -0.0033 *** -0.0034 *** -0.0034 *** -0.0034 *** -0.0034 *** -0.0035 *** LTV ratio 0.0169 *** 0.0169 *** 0.0168 *** 0.0172 *** 0.0169 *** 0.0170 *** 0.0170 *** 0.0170 *** 0.0178 *** ARM 0.0978 *** 0.1157 *** 0.1028 *** 0.1191 *** 0.0820 *** 0.0824 *** 0.0942 *** 0.0930 *** 0. The table reports the estimation results using three parametric approaches: the two-stage instrumental variable probit, the two-stage linear model (Dionne, La Haye, and Bergerès, 2015), and the bivariate probit. The table reports the estimation results using three parametric approaches: the two-stage instrumental variable probit, the two-stage linear model (Dionne, La Haye, and Bergerès, 2015), and the bivariate probit.…”

Do Better Informed Investors Always Do Better? A Buyback Puzzle

“…They find that firms which own tracts adjacent to those being auctioned, and are thus presumably better informed, subsequently achieve significantly higher profits than nonneighbor firms. Similarly, Dionne, La Haye, and Bergerès () show that target firm blockholders, who are presumably better informed about the firm's prospects, earn higher returns than other bidders in corporate acquisitions.…”