Target-firm information asymmetry and acquirer returns*

Officer, Micah S.; Poulsen, Annette B.; Stegemoller, Mike

doi:10.1093/rof/rfn017

Cited by 306 publications

(202 citation statements)

References 27 publications

Supporting

Mentioning

184

Contrasting

Unclassified

Order By: Relevance

“…This allows for the calculation of the premium (PREMIUM), which is the outcome of the division of the deal payment, covering the initial payment and the deferred payment if the earnout is used, by the target's pre-acquisition profitability (PBT), as in Officer (2007) and Officer et al (2009). Table 2 reports the mean and median of PREMIUM in addition to other key variables included in our analysis.…”

Section: Sample Statisticsmentioning

confidence: 99%

“…In addition to balancing the overall level of profitability level of the private targets between earnout and non-earnout financed deals on the matched sample, we also balance the percentage of the deal payment financed with stock (STOCK_PERC) in order to reflect the possible trade-off between stock and earnout financing, 13 given that they have contingent payment properties (Chang 1998;Dataret al, 2001;Officer et al, 2009). 14 To emphasize the importance of balancing the portions of domestic and cross-border acquisitions in the matched sample, we also include in our estimations a dichotomous variable (CBA) that is assigned the value of 1 if the target is a non-UK firm, and 0 otherwise.…”

Section: The Balancing Of the Main Covariatesmentioning

confidence: 99%

“…Such information asymmetry is highly relevant in private target acquisitions due to the low information disclosure requirements concerning private firms (Officer et al, 2009). 1 In an earnout financed deal, the selling firm receives only a part of the deal's payment, i.e.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Barbopoulos

Adra

2016

International Review of Financial Analysis

View full text Add to dashboard Cite

In this article, based on both parametric and non-parametric methods, we provide a robust solution to the long-standing issue on how earnouts in corporate takeovers are structured and how their structure influences the takeover premia and the abnormal returns earned by acquirers. First, we quantify the effect of the terms of earnout contract (relative size and length) on the takeover premia. Second, we demonstrate how adverse selection considerations lead the merging firms to set the initial payment in an earnout financed deal at a level that is lower than, or equal to, the full deal payment in a comparable non-earnout financed deal. Lastly, we show that while acquirers in non-earnout financed deals experience negative abnormal returns from an increase in the takeover premia, this effect is neutralised in earnout financed deals.

show abstract

Section: Sample Statisticsmentioning

confidence: 99%

Section: The Balancing Of the Main Covariatesmentioning

confidence: 99%

See 1 more Smart Citation

The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Barbopoulos

Adra

2016

International Review of Financial Analysis

View full text Add to dashboard Cite

show abstract

“…Thus, there is extensive information asymmetry between the bidder and the target in a takeover of a privately-held target (Officer et al 2006). The risk of bidder overpayment is a greater concern when pursuing larger private targets because of the larger potential adverse impact due to overpayment.…”

Section: Effect Of Relative Sizementioning

confidence: 99%

“…Houston and Ryngaert (1997) confirm that stock helps reduce the "lemon" problems concerning the target's value. The argument is also employed by a more recent study by Officer et al (2006) to explain the bidder returns in takeovers of privately-held firms. We apply a dummy variable set equal to 1.0 for high-tech firms and zero otherwise, based on the classification of high-tech firms by the SDC.…”

Section: Effect Of High-tech Targetsmentioning

confidence: 99%

Determinants of the medium of payment used to acquire privately-held targets

Madura

Ngo²

2010

J Econ Finan

View full text Add to dashboard Cite

Since private firms have a unique ownership structure, the method of payment decision when acquiring private firms is influenced by a different set of factors than the method of payment decision when acquiring public firms. We find that bidders are more likely to pay for private targets with stock when the capital gain tax rate is relatively high. This relationship is attributed to greater tax benefits to private owners who receive stock in periods when the capital gains tax is high. Bidders are more likely to use stock in takeovers when the targets are high-tech firms, which we attribute to protection against overpayment by using a contingent pricing method. Bidders are more likely to use cash in takeovers since the Sarbanes-Oxley Act, which we attribute to the higher level of due diligence by bidder managers and board members, and therefore a reduced need for contingent pricing methods like stock. Overall, the results suggest the likelihood of using stock to acquire private targets is positively related to the information asymmetry between the parties, while the likelihood of using cash is greater when conditions (such as SOX) reduce the information asymmetry.

show abstract