Adverse Selection Risk and the Method of Sale in Acquisitions

Abstract:     
We find that adverse selection risk impacts the target’s observed method-of-sale - an auction or one-on-one negotiation. The wealth accrued to both bidders and targets increases in auctions, especially when adverse selection risk is low (i.e., in non-target initiated acquisitions). This benefit, however, disappears when the target initiates the acquisition, arguably due to higher adverse selection risk concerns. Overall, the individual and combined gains from acquisitions are larger when adverse selection risk is lower. Consistent with recent theoretical two-stage sale models, our analysis highlights the importance of considering private information factors when examining the impact of the method-of-sale and shareholder gains.

Number of Pages in PDF File: 51

Keywords: Acquisitions, Auction, Negotiation, Information-Asymmetries, Adverse Selection

JEL Classification: G34, G14, L14, M40, D82

working papers series