Adverse Selection and M&A Design: The Roles of Alliances and Ipos

35 Pages Posted: 24 Aug 2005 Last revised: 8 Apr 2014

See all articles by Roberto Ragozzino

Roberto Ragozzino

University of Liverpool; University of Tennessee

Jeffrey J. Reuer

Purdue University - Krannert School of Management

Date Written: April 1, 2006

Abstract

This paper investigates strategic alliances and initial public offerings (IPOs) as factors that potentially mitigate the risk of adverse selection in mergers and acquisitions. It is hypothesized that prior alliances between acquirers and targets as well as IPOs undertaken by targets reduce information asymmetries or lessen their effects by offering targets signaling opportunities. Using data on the types of consideration used in M&A transactions to reflect the allocation of overpayment risk across acquirers and targets, we find that targets' prior alliances with acquirers as well as targets' IPOs reduce the likelihood of using stock, or the amount of stock used, to finance acquisitions of these targets. We also present evidence that alliances and IPOs substitute for one another.

Keywords: Merger, acquisition, joint venture, IPO

JEL Classification: G3

Suggested Citation

Ragozzino, Roberto and Reuer, Jeffrey J., Adverse Selection and M&A Design: The Roles of Alliances and Ipos (April 1, 2006). Reuer, J. and Ragozzino, R. Adverse Selection in Acquisitions of New Ventures: The Roles of Alliances and IPOs in M&A Design. 2008. Journal of Economic Behavior & Organization, Vol. 66: 195-212 . Available at SSRN: https://ssrn.com/abstract=785912 or http://dx.doi.org/10.2139/ssrn.785912

Roberto Ragozzino

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/roberto-ragozzino/

University of Tennessee ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

HOME PAGE: http://robertoragozzino.com

Jeffrey J. Reuer (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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