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
Date Written: February 2006
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: Suggested Citation