Does Investor Diversity of Opinion, Information Asymmetry, or Uncertainty Resolution Affect Acquirer Returns?

Charles A. Dice Center Working Paper No. WP 2004-19

41 Pages Posted: 13 Sep 2004

See all articles by Sara B. Moeller

Sara B. Moeller

University of Pittsburgh - Finance Group

Frederik P. Schlingemann

University of Pittsburgh - Finance Group; Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: February 2006

Abstract

Several literatures predict a relation between acquirer announcement returns and uncertainty about the acquirer's growth prospects. Models with downward-sloping demand curves for stocks predict that an increase in shares outstanding leads to a lower stock price for firms with greater diversity of opinion among investors. Information asymmetry models imply that equity issues by firms with greater information asymmetries are accompanied by larger share price decreases. Valuation models predict a negative relation between uncertainty resolution and share prices. We find that, for our sample of firms with long-term analyst forecasts, acquirer abnormal returns for acquisitions of public firms paid for with equity decrease as proxies for the acquirer's diversity of opinion, information asymmetry, and/or uncertainty resolution increase. In contrast, abnormal returns for acquisitions of public firms paid for with cash and for acquisitions of private firms paid for with equity either are unaffected or increase as these proxies increase. Strikingly, while diversity of opinion can explain the abnormal returns difference between cash and equity offers for public firms, idiosyncratic volatility appears to be capable of explaining abnormal return differences between cash and equity offers for public firms as well as equity offers for private firms.

Keywords: Acquisitions, bidder returns, analyst earnings forecasts, information asymmetries, divergence

JEL Classification: G31, G32, G34

Suggested Citation

Moeller, Sara B. and Schlingemann, Frederik Paul and Stulz, Rene M., Does Investor Diversity of Opinion, Information Asymmetry, or Uncertainty Resolution Affect Acquirer Returns? (February 2006). Charles A. Dice Center Working Paper No. WP 2004-19. Available at SSRN: https://ssrn.com/abstract=588401 or http://dx.doi.org/10.2139/ssrn.588401

Sara B. Moeller

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Frederik Paul Schlingemann

University of Pittsburgh - Finance Group ( email )

368A Mervis Hall
Pittsburgh, PA 15260
United States
(412) 648 1847 (Phone)
(412) 648 1693 (Fax)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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