How does information asymmetry affect the division of gains in mergers?

Abstract

Purpose

The purpose of this paper is to analyze the implications of the target valuation uncertainty on the wealth distribution between the target and acquirer firms in successful mergers. The paper specifically analyzes the division of the total dollar gains between the two parties and also whether the target and/or the acquirer experience a positive/negative gain in mergers when valuation of the target company is more uncertain.

Design/methodology/approach

The analyses contrast the implications of the uncertainty in three well‐known merger hypotheses; the market‐for‐corporate‐control, hubris and synergy.

Findings

The results are supportive of the implications of the synergy hypothesis. As target valuation uncertainty decreases, it is more likely that both parties experience positive gains from the transaction although more of the gains from the merger significantly shift towards the target company.

Originality/value

Results suggest that both parties are bargaining on the synergy gains and the target is able to negotiate a greater portion of the synergy gains when the value of the target becomes more predictable.

Citation

Sinan Goktan, M. (2013), "How does information asymmetry affect the division of gains in mergers?", Managerial Finance, Vol. 39 No. 1, pp. 60-85. https://doi.org/10.1108/03074351311283577