Buyer Beware: Ethics, Adverse Selection, and Target Method of Sale Strategies

50 Pages Posted: 9 Feb 2009 Last revised: 17 Aug 2017

See all articles by Carol Anilowski Cain

Carol Anilowski Cain

Winston-Salem State University

Gary Fleischman

Texas Tech University

Antonio J. Macias

Baylor University

Juan Manuel Sanchez

University of Texas at San Antonio

Date Written: August 16, 2017

Abstract

Abstract: We examine the impact of ethical and acquisition dynamics related to whether the target initiates the sale of the firm on the method-of-sale decision (auctions vs. one-on-one negotiations), and on shareholder wealth creation. While we find a strong positive relationship between proxies of adverse selection risk and the likelihood of target initiation, robustness tests suggest target initiation itself is a unique indicator of information asymmetry in an acquisition environment. We also find that most target initiated transactions follow an auction as the method of sale. Regarding shareholder wealth, we find that the wealth accrued to both bidders and targets increases in auctions, especially in non-target initiated acquisitions. This benefit, however, disappears when the target initiates the acquisition, arguably due to higher unethical adverse selection risk concerns, which is consistent with Akerlof’s (1970) theory of the market for lemons. When adverse selection risk is lower, both the bidder’s and target’s combined gains from acquisitions are higher. The findings have noteworthy implications for managing the target’s ethical reputation.

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

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

Suggested Citation

Anilowski Cain, Carol and Fleischman, Gary and Macias, Antonio J. and Sanchez, Juan Manuel, Buyer Beware: Ethics, Adverse Selection, and Target Method of Sale Strategies (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=1339963 or http://dx.doi.org/10.2139/ssrn.1339963

Carol Anilowski Cain

Winston-Salem State University ( email )

601 Martin Luther King, Jr. Dr.
RJR 126
Winston-Salem, NC 27110
United States

Gary Fleischman

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Antonio J. Macias (Contact Author)

Baylor University ( email )

Waco, TX 76798
United States

Juan Manuel Sanchez

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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