Review of Finance Advance Access published online on May 10, 2008
Review of Finance, doi:10.1093/rof/rfn017
Target-firm information asymmetry and acquirer returns*
a Marshall School of Business, University of Southern California
b Terry College of Business, University of Georgia
c Rawls College of Business, Texas Tech University
We show that acquirer returns are significantly higher in stock-swap acquisitions of difficult-to-value targets, as measured by R&D intensity and idiosyncratic return volatility. This finding contributes to an explanation of the determinants of, and value gains from, using stock as a method of payment. The effects of target-valuation uncertainty on both the method of payment and the market reaction to acquisitions are more likely to be apparent in samples of private acquisitions, as these effects can be masked in samples of acquisitions of publicly held targets. Nevertheless, our results hold for publicly traded targets in multivariate analysis.
Key Words: G34 • G32
* We thank Audra Boone, Harry DeAngelo, Mara Faccio, Chris James, Wayne Mikkelson, Sara Moeller, Harold Mulherin, Frederik Schlingemann, two anonymous referees, the editor (Marco Pagano), seminar participants at the Asian FMA Conference, Baylor University, the Ohio State University Alumni Conference, the University of Oregon Conference on Empirical Research in Corporate Finance, the Universities of Lancaster, Pittsburgh, and Southern California, and, especially, Jeffry Netter for helpful comments. We also thank Olga Batura for valuable research assistance. Previous versions of this paper were distributed under the title "Acquirer returns in acquisitions of privately held targets."