The Asymmetric Private Information Mask: A Comparative Analysis of Private Equity Bids and Tender/Merger Offers

Abstract

Increased regulation imposed by the Securities and Exchange Commission to mitigate selective disclosure has led to a rise in private equity funds as an alternative to developed market investments. The extent of any informational advantage that participants gain through selective disclosure (due to the comparatively lower oversight of selective disclosure surrounding private equity transactions) remains contentious. This study tests whether private equity target firms exhibit differences in adverse selection costs due to informed trading pre- and post-announcement, relative to tender/merger target firms. The analysis employs the probability of informed trading derived from market bid-ask spreads. Private information may result in increased insider trading as investors seek to maximise profits, acting on private company information. On the other hand, anticipated profit from insider trading may be negated due to the time taken to convert private information into monetisable assets. This study finds a significant decrease in the probability of informed trading in the post-announcement period for private equity bid targets relative to tender/merger offer targets. This result is interpreted as decreased information asymmetry post-announcement for private equity bid targets relative to tender/merger offer targets.