Adverse Selection in Acquisitions of Small Manufacturing Firms: A Comparison of Private and Public Targets

Posted: 9 Nov 2009

See all articles by Jung-Chin Shen

Jung-Chin Shen

York University

Jeffrey J. Reuer

Purdue University - Krannert School of Management

Date Written: 2005

Abstract

Acquisitions of small (less than 500 employees)manufacturing firms are analyzed in this study, with an emphasis onunderstanding the differences between acquisitions of public firms as comparedto acquisitions of private firms. To begin, a literature review is provided topresent theoretical arguments and research hypotheses. Data used in the study were obtained from 923 acquisitions that occurredbetween 1996 and 1999 in the manufacturing industry as captured by theSecurities Data Corporate (SDC) database.Of the 923 acquisitionsconsidered, 457 involved public targets. The statistical results indicate thatwhen private firms are acquired, they tend to be more mature firms in terms ofage. This results from the acquirer's desire to lessen his risk of adverseselection. Acquirers are also more willing to acquire private firms withintheir own industry or core business. Small firms that have gone public experience less difficulty in valuationthan their private counterparts, as they have revealed more information in acreditable environment. Private firms that wish to lessen the uncertainty ofthe value of their intangible assets should consider using collaborationagreements that reduce information asymmetry. (SRD)

Keywords: Acquisition targets, VentureXpert dataset, Adverse selection, Investment decisions, Buyers, Manufacturing industries, Private firms, Public firms, Risk management, Transaction cost economics, Valuation, Acquisitions & mergers, Information asymmetry, Intangible assets, Interfirm alliances

Suggested Citation

Shen, Jung-Chin and Reuer, Jeffrey J., Adverse Selection in Acquisitions of Small Manufacturing Firms: A Comparison of Private and Public Targets (2005). Small Business Economics, Vol. 24, Issue 4, p. 393-407 2005. Available at SSRN: https://ssrn.com/abstract=1501544

Jung-Chin Shen (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Jeffrey J. Reuer

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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