Adverse Selection in Acquisitions of Small Manufacturing Firms: A Comparison of Private and Public Targets
Posted: 9 Nov 2009
Date Written: 2005
Abstract
Acquisitions of small (less than 500 employees)manufacturing firms are analyzed in this study, with an emphasis onunderstanding the differences between acquisitions of public firms as comparedto acquisitions of private firms. To begin, a literature review is provided topresent theoretical arguments and research hypotheses. Data used in the study were obtained from 923 acquisitions that occurredbetween 1996 and 1999 in the manufacturing industry as captured by theSecurities Data Corporate (SDC) database.Of the 923 acquisitionsconsidered, 457 involved public targets. The statistical results indicate thatwhen private firms are acquired, they tend to be more mature firms in terms ofage. This results from the acquirer's desire to lessen his risk of adverseselection. Acquirers are also more willing to acquire private firms withintheir own industry or core business. Small firms that have gone public experience less difficulty in valuationthan their private counterparts, as they have revealed more information in acreditable environment. Private firms that wish to lessen the uncertainty ofthe value of their intangible assets should consider using collaborationagreements that reduce information asymmetry. (SRD)
Keywords: Acquisition targets, VentureXpert dataset, Adverse selection, Investment decisions, Buyers, Manufacturing industries, Private firms, Public firms, Risk management, Transaction cost economics, Valuation, Acquisitions & mergers, Information asymmetry, Intangible assets, Interfirm alliances
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