Contracting Costs and Information Asymmetry Reduction in Cross-Border M&A

Abstract

This paper explores the contracting costs of conducting mergers and acquisitions (M&A), creates a theoretical model of the information asymmetry involved, and shows how buying firms employ several mechanisms to reduce such asymmetry. Extending prior literature, the paper examines these costs in both domestic and cross-border settings using a sample of over 3000 M&A deals. I consider both the fees paid and the time required in the bargaining phase to be contracting costs, and model them simultaneously to help explicate their endogenous relationship. The results show that buyers in cross-border deals are more likely to employ mechanisms to affect information asymmetry, while the employment of these mechanisms affects contracting costs. The results help to explain why cross-border M&A are more costly yet more quickly executed. Finally, modelling the use and effects of the mechanisms is sufficient to explain the contracting cost differences between domestic and cross-border M&A.