Public Peer Firm Information in Mergers and Acquisitions of Privately Held Targets

Abstract

The lack of publicly available information about privately-held target firms exacerbates acquirers’ adverse selection risk in private target M&As. Although acquirers have access to inside information about the private target during the due diligence process, a number of constraints and market frictions prohibit acquirers from fully resolving their information problems during private target acquisitions. In this paper, we investigate whether and under what circumstances public information about peer firms in a private target’s industry helps acquirers make more profitable acquisitions. We predict and find that when public peer firms’ prices are more informative about future earnings, acquirers’ acquisitions of private targets are more profitable. Specifically, we find that public peer firm price informativeness is more useful to acquirers when they face greater time- and/or resource constraints that limit their processing and verification of private targets’ information obtained via due diligence. Moreover, consistent with the notion that public peer firm information acts as a complement rather than a substitute for private firm-specific information, we find that acquirers make more profitable acquisitions only when they face greater ex ante uncertainty about the private target. Overall, we provide evidence that public peer firm information facilitates acquirers’ valuation of informationally-opaque private target firms.

Keywords: peer firms; information environment; mergers and acquisitions; private firms; price informativeness

JEL Classification: G14; G34; M41