Adverse selection and M&A design: The roles of alliances and IPOs

Jeffrey J. Reuer and Roberto Ragozzino

Journal of Economic Behavior & Organization, 2008, vol. 66, issue 2, 195-212

Abstract: This paper investigates strategic alliances and initial public offerings (IPOs) as factors that potentially mitigate the risk of adverse selection in acquisitions. It is hypothesized that prior alliances between acquirers and targets as well as IPOs undertaken by targets reduce adverse selection in M&A. Examining the consideration used in M&A transactions to reflect the allocation of overpayment risk, we find that targets' prior alliances with acquirers and targets' IPOs reduce the likelihood of using stock, or the amount of stock used, to finance acquisitions. We also present evidence that alliances and IPOs substitute for one another.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:66:y:2008:i:2:p:195-212

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