Time since targets’ initial public offerings, asymmetric information, uncertainty, and acquisition pricing

Abstract

Abstract We document that acquirer announcement returns decrease and takeover premiums increase with the length of time since targets’ initial public offerings. Declining asymmetric information that leads to lower target valuation uncertainty for the acquirer can explain these effects. Newly public firms should have greater information asymmetry than established public firms that makes the target valuation more uncertain for a less-informed acquirer. Risk-averse acquirer managers pay less for riskier targets, resulting in relatively low takeover premiums and high acquirer announcement returns. Over time, as a target builds a public track record, the asymmetric information about its valuation declines, and takeover premiums increase to the benefit of target shareholders and the detriment of acquirer shareholders.