Do mergers and acquisitions affect information asymmetry in the banking sector?

Abstract

Purpose

This paper aims to investigate the consequences of mergers and acquisitions (M&As) on information asymmetry in the banking sector. Specifically, the authors look at whether specific firm or deal characteristic influence information asymmetry levels between insiders and investors, as well as the impact of recent regulation such as the Dodd–Frank Act.

Design/methodology/approach

The authors decompose the M&A process into three periods (pre-announcement, negotiation and post-completion period) and document changes in the information asymmetry levels between insiders and investors through the M&A process. The authors capture changes in information asymmetry using six different spread-based information asymmetry measures.

Findings

The authors find evidence that information asymmetry increases following M&A announcement and decreases following deal completion. These findings are more pronounced for acquisitions involving a private target, all-cash deals and for mergers, as opposed to acquisition of assets. We find that overall, successful mergers improve the quality of the information environment, while failed deals degrade it. Additionally, the enactment of Dodd–Frank reduced the magnitude of the changes in information asymmetry during the M&A process. The results are important to regulators, policy makers and investors.

Originality/value

To authors’ knowledge, this is the first study that looks at the effect of bank M&As on information asymmetry as well as the effect of regulations on information asymmetry.

Citation

Howe, J.S. and Morillon, T.G. (2020), "Do mergers and acquisitions affect information asymmetry in the banking sector?", Managerial Finance, Vol. 46 No. 12, pp. 1521-1547. https://doi.org/10.1108/MF-03-2020-0127