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

University of St. Gallen, Department of Economics, Discussion Paper No. 2008-15

31 Pages Posted: 18 Aug 2008  

Thomas Borek

Eidgenossische Technische Hochschule Zurich (ETHZ) - Department of Mathematics

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 2008

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.

Keywords: merger, asymmetric information, oligopoly

JEL Classification: D43, D82, L13, L33

Suggested Citation

Borek, Thomas and Buehler, Stefan and Schmutzler, Armin, Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach (June 2008). University of St. Gallen, Department of Economics, Discussion Paper No. 2008-15. Available at SSRN: https://ssrn.com/abstract=1233902 or http://dx.doi.org/10.2139/ssrn.1233902

Thomas Borek

Eidgenossische Technische Hochschule Zurich (ETHZ) - Department of Mathematics ( email )

ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland
+41-1-6323406 (Phone)

Stefan Buehler (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

FGN-HSG
Varnbuelstr. 19
CH-9000 St. Gallen
Switzerland
+41-71-224-2303 (Phone)

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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