How Do Diversity of Opinion and Information Asymmetry Affect Acquirer Returns?

Abstract

We examine the theoretical predictions that link acquirer returns to diversity of opinion and information asymmetry. Theory suggests that acquirer abnormal returns should be negatively related to information asymmetry and diversity-of-opinion proxies for equity offers but not cash offers. We find that this is the case and that, more strikingly, there is no difference in abnormal returns between cash offers for public firms, equity offers for public firms, and equity offers for private firms after controlling for one of these proxies, idiosyncratic volatility. (JEL G31, G32, G34) This article examines whether variables suggested by diversity-of-opinion models and information asymmetry models are helpful in understanding the cross-sectional variation in acquirer announcement returns using a sample of pure equity offers and pure cash offers for public and private firms from 1980 to 2002. We document that these variables, the uncertainty proxies, explain a significant fraction of the cross-sectional variation in acquirer announcement returns. Perhaps most strikingly, after controlling for the uncertainty proxies, there is no difference in abnormal returns between cash offers for public firms, equity offers for public firms, and equity offers for private firms. Using two proxies for diversity of opinion employed previously in the literature, the standard deviation of analyst forecasts and breadth of ownership, we show that bidder abnormal returns for acquisitions of

Competition and the Dynamics of Takeover Contests

“…However, private auctions might arise, and they are more likely to be observed when T is small, (i.e. the intensity of potential competition) is low and termination fees are (relatively) high: all these elements increase the value for R to delay the agreement, in turn giving I time to …nd stronger competitors and organize an auction.This result is also consistent with the observation of few public auctions (see also and Moeller et al (2007) who report that less than 4% of the deals are subject to observable public competition).…”

“…by substitution of (32). As in Fishman (1988), the uniqueness of this equilibrium can be proved applying the credibility requirement of Grossman and Perry (1986).…”

“…A vast empirical literature tries to assess whether this theory is at work in reality reaching controversial conclusions. For example, Moeller et al (2007) …nd that less than four percent of deals are subject to public competition and Betton…”

Cross-border mergers and acquisitions and default risk

“…Furfine and Rosen (2011) find strong support for this notion and report that post-merger default risk increases proportionally to the share of acquiring managers' compensation derived from stock options. A third possibility is that managers could exploit potential information asymmetry resulting in increased risk-taking in the post-merger period (Moeller, 2007). In those transactions that the level of asymmetric information is high, managers are able to get away by undertaking value-destroying takeovers (Moeller et al 2007).…”

“…A third possibility is that managers could exploit potential information asymmetry resulting in increased risk-taking in the post-merger period (Moeller, 2007). In those transactions that the level of asymmetric information is high, managers are able to get away by undertaking value-destroying takeovers (Moeller et al 2007). Furfine and Rosen (2011) find strong impact of idiosyncratic volatility on acquiring firms' default risk.…”