Can information asymmetry explain both the post-merger value and the announcement discount in M&As?

M. Kabir Hassan and Yasser Alhenawi

International Review of Economics & Finance, 2022, vol. 77, issue C, 222-243

Abstract: This paper analyzes the relation between the announcement discount and the post-merger valuation of merger and acquisition transactions (M&As); and proposes that the two are linked by the implications of the information asymmetry hypothesis of Myers and Majluf (1984). We track the information asymmetry, value, and synergies of M&As over a three-year post-merger window. The analysis demonstrates that the announcement discount is proportional to the rise in information inequality around the announcement date (not the pre-merger information asymmetry). The announcement discount is also positively related to the post-merge gains which grow in tandem with the gradual decline in information asymmetry and improvements in internal capital market efficiencies, market power, and access to capital markets. Collectively, our findings suggest that M&As instigate a temporary spike in information inequality that results in temporary loss in shareholders' wealth. Over time, synergies materialize, information inequality fades away, and value improves. Our results are robust to several variations in specifications and assumptions including Heckman two-stage self-selection model. Our proposition suggests that management and outside investors should not be swayed by initial market reaction to deal announcements because the true gains of M&As materialize in the long-run. Nevertheless, management should disclose adequate information about future synergies to mitigate the market's initial negative reaction.

Keywords: Mergers and acquisitions; Corporate finance; Information asymmetry; Factor analysis (search for similar items in EconPapers)
JEL-codes: G30 G34 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056021001933
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:77:y:2022:i:c:p:222-243

DOI: 10.1016/j.iref.2021.09.009

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().