Liquidity and Information Asymmetry Considerations in Corporate Takeovers

Adra, S., and L.G., Barbopoulos, Liquidity and Information Asymmetry Considerations in Corporate Takeovers, The European Journal of Finance 2019, VOL. 25, NO. 7, 724–743 https://doi.org/10.1080/1351847X.2018.1543202

Posted: 16 Mar 2021

See all articles by Samer Adra

Samer Adra

University of Birmingham

Leonidas G. Barbopoulos

University of Edinburgh

Date Written: 2019

Abstract

We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment.

Keywords: Stock market liquidity, Listed targets, Private targets, Method of payment, Takeover premia, Risk-adjusted returns

JEL Classification: G12, G14, G30, G34

Suggested Citation

Adra, Samer and Barbopoulos, Leonidas G., Liquidity and Information Asymmetry Considerations in Corporate Takeovers (2019). Adra, S., and L.G., Barbopoulos, Liquidity and Information Asymmetry Considerations in Corporate Takeovers, The European Journal of Finance 2019, VOL. 25, NO. 7, 724–743 https://doi.org/10.1080/1351847X.2018.1543202, Available at SSRN: https://ssrn.com/abstract=3797064

Samer Adra

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

Leonidas G. Barbopoulos (Contact Author)

University of Edinburgh ( email )

University of Edinburgh Business School
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

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