Target Information Asymmetry and Acquisition Price

41 Pages Posted: 30 Sep 2016

See all articles by Peter Cheng

Peter Cheng

Queen's University - School of Policy Studies

Lin (Jack) Li

Hong Kong Polytechnic University

Wilson H.S. Tong

Hong Kong Polytechnic University

Date Written: July/August 2016

Abstract

This study investigates the effects of target information asymmetry in a takeover transaction. We find that a target with more information asymmetry receives a larger bid premium from the acquirer. We examine the response of the acquirer's investors to the bid to clarify whether the larger bid premium is an overpayment by the acquirer. We observe that the acquirer's investors respond more positively to the acquisition of an opaque target, indicating that the market recognizes the acquirer's valuation of the opaque target and agrees with the offer price. Our results indicate that corporate takeovers help to resolve asymmetric information in the capital market.

Keywords: information asymmetry, price discount, bid premium, acquirer return

Suggested Citation

Cheng, Peter and Li, Lin (Jack) and Tong, Wilson H.S., Target Information Asymmetry and Acquisition Price (July/August 2016). Journal of Business Finance & Accounting, Vol. 43, Issue 7-8, pp. 976-1016, 2016, Available at SSRN: https://ssrn.com/abstract=2845598 or http://dx.doi.org/10.1111/jbfa.12202

Peter Cheng (Contact Author)

Queen's University - School of Policy Studies ( email )

Ontario K7L 3N6
Canada

Lin (Jack) Li

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Wilson H.S. Tong

Hong Kong Polytechnic University ( email )

Hong Kong

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