Essays on Informational Asymmetries in Mergers and Acquisitions
Abstract: This thesis covers issues related to financing in mergers and acquisitions. It studies the relationship between firms’ financing conditions and firms’ decisions to either buy or sell assets.The first paper, "Cross-border mergers and acquisitions with financially constrained owners", studies the effects of costly external financing in international asset sales. We propose a cross-border merger model with home biased financially constrained owners in which the subsequent investments of the buyer and seller can be determined. We show that governmental policies blocking foreign acquisitions to protect the domestic industry can be counterproductive and propose “financial efficiency" defense in merger law.In the second paper, "Misvaluation and financial constraints: method of payment and buyer identity in mergers and acquisitions", I study how stock price misvaluation and financial frictions affect whether an acquisition occurs between or within industries and whether the acquirer pays in cash or stocks. I set up a model where stock market misvaluation correlates within industries and across industries and assume that managers’ have private information regarding their own firm and firms similar to it. The model yields predictions regarding which firm acquires which firm and the method of payment used in transactions. The third paper, "Misvaluation and merger activity", investigates how merger activity varies over time and sectors of the economy. Using data on mergers between publicly traded US firms, I study the role of stock overvaluation on merger activity. I focus on how overvaluation affects mergers occurring within sectors differently from those occurring between sectors and how the effect differs between cash- and stock-financed mergers. The results suggest that marketwide misvaluation does not drive overall merger activity, but that sector-level overvaluation increases the probability that firms conduct stock-financed acquisitions of firms in other sectors. The results indicate that overvaluation affects stock-financed merger activity only if it increases the overvaluation of some firms relative to the overvaluation of other firms. An analysis of the acquisition decisions of individual firms support this interpretation.
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