The role of initiating party in corporate takeovers : an information asymmetry argument

Abstract

This paper analyzes the role of initiating party in estimating takeover performance. We show that there are significant differences in bid-premiums and cumulative abnormal returns (CAR) depending on deal initiator. All else being equal, targets tend to receive higher premiums and demonstrate higher CARs when takeovers are initiated by acquirers. Adverse selection risk theory was used to explain such variation. By using a sample of 3316 publicly announced corporate takeovers in the US, we also show that exposure to adverse selection risk is moderated by industry concentration level and merger type. The Herfindahl–Hirschman Index was used to measure industry concentration and showed positive and statistically significant effect on CARs in the manufacturing industry, yet other concentration measures in other industries did not show these effects. Furthermore, drawing on our model we found that the level of information asymmetry was relatively higher in conglomerate mergers which, once again, witnessed the important role of initiating party in estimating takeover performance.