Does the Private Company Discount Fully Compensate for the Information Risk? Evidence from Acquisition Outcomes

50 Pages Posted: 4 Jul 2023 Last revised: 14 Nov 2024

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Songyi Han

Norwegian School of Economics (NHH)

Sharon P. Katz

INSEAD

Date Written: May 23, 2024

Abstract

Past research suggests that acquisitions of private firms tend to have more positive outcomes than those of publicly listed firms due to  a price discount from either illiquidity or higher information risk. In this study, we separate the two components by analyzing the outcomes of acquisitions of a hybrid group of firms that are privately owned yet subject to the same reporting and disclosure requirements of publicly traded firms (hereafter, ‘quasi-private’ firms). Since neither quasi-private nor private firms have liquid equity, the difference between their acquisition outcomes (after controlling for other factors) arises from the information risk discount. After controlling further for contractual arrangements designed to mitigate information risk such as earnouts or structuring the deal as a stock exchange, we find that acquiring quasi-private firms yields better outcomes than private firms. This result suggests that the contractual arrangements used by acquirers of private firms to mitigate the higher information risk do not fully compensate for it. We also find that the requirement that acquirers disclose the financial statements of the acquired firm after the significant acquisition announcement is not a substitute for the availability of regulated financial reporting and disclosure on acquired firms throughout their history. 

Keywords: Merger and acquisition, M&A, Private company discount, liquidity discount, information risk, financial reporting, corporate disclosure

JEL Classification: G34, M40, M41, D82

Suggested Citation

Givoly, Dan and Han, Songyi and Katz, Sharon P., Does the Private Company Discount Fully Compensate for the Information Risk? Evidence from Acquisition Outcomes (May 23, 2024). INSEAD Working Paper No. 2024/64/ACC, Available at SSRN: https://ssrn.com/abstract=4494684 or http://dx.doi.org/10.2139/ssrn.4494684

Dan Givoly

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Songyi Han

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway

Sharon P. Katz (Contact Author)

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

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