Information asymmetry in the takeover market

Abstract

There are many takeover studies, but how information asymmetry of a target affects transaction processing receives little attention. This study fills this gap by examining the impact of the target information asymmetry on the bid premium, the target gains and the bidder gains in takeovers. Using a sample of 1,612 acquisitions of publicly listed target firms over the period of 1985-2006, this study shows that information asymmetry has a significantly positive effect on the bid premium paid for the target. When the target is more opaque, the bid premium becomes higher and so do the target abnormal returns. These findings are inconsistent with the intuition that a negative relation exists between the target information asymmetry and the bid premium and the target gains in takeovers. The high premium paid for an opaque target does not appear to be a wealth transfer from the bidder. Investors do not take the high premium for an opaque target as an overpayment by the bidder. Investors respond less negatively or even positively to the bidder when an opaque target is acquired relative to a transparent one. Hence, new value is created when an opaque target is acquired. The study also finds that the new value comes from two sources. First, it is a reflection of the expected synergy that will be realized in future operation by combining two entities. Second, the new value comes from the revaluation of the target that is undervalued by the market before the takeover attempt.