Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach

Abstract:     
This paper provides a simple reduced-form framework for analyzing merger decisions in the presence of asymmetric information about firm types, building on Shapiro's (1986) oligopoly model with asymmetric information about marginal costs. We employ this framework to examine what types of firms are likely to be involved in mergers. While we give sufficient conditions under which only low-type firms merge, as a lemons rationale would suggest, we also argue that these conditions will often be violated in practice. Finally, our analysis shows how signaling considerations affect merger decisions.

Number of Pages in PDF File: 31

Keywords: merger, asymmetric information, oligopoly

JEL Classification: D43, D82, L13, L33

working papers series