Asymmetric Information and Target Returns

Abstract

This paper examines the relationship between asymmetric information and target returns in M&As. We argue that if managers possess favorable (unfavorable) asymmetric information, they will offer, ceteris paribus, high (low) premia, affecting target returns accordingly. We propose several proxies of asymmetric information. The empirical evidence strongly supports our hypothesis as we find that target returns and premiums are significantly negatively related to asymmetric information regarding synergy gains. Our results are robust after controlling for several target and deal characteristics.

Keywords: Asymmetric Information, Mergers and Acquisitions, Target Announcement Returns, Takeover Premiums

JEL Classification: G11, G14, G34