Representations and Warranties Insurance and Valuation Uncertainty in Mergers and Acquisitions

Abstract

We obtain a proprietary sample of claims for breaches of representations and warranties in acquisition agreements related to 1,690 acquisitions comprising $470 billion in enterprise value. We analyze this claims data to study how and when representations and warranties (“reps”) matter. Parties appear to negotiate reps consistent with the risk allocation necessary in an agreement. They utilize reps to reduce information asymmetry and create value depending upon the industry, firm volatility, and governing law. Our findings also show that more experienced acquirers such as private equity appear to utilize reps more efficiently to create value. These results highlight the importance of reps in risk allocation, reducing information asymmetry and creating value, but they also highlight the role of investor skill in creating value from reps.