Asymmetric information and target firm returns

This article examines the relationship between asymmetric information and target firm returns in mergers and acquisitions (M&As). We argue that if managers possess favourable (unfavourable) asymmetric information, they will offer, ceteris paribus, a high (low) premium, affecting target firm returns accordingly. We propose several proxies of asymmetric information. The empirical evidence strongly supports our hypothesis as we find that target firm returns are significantly negatively related to asymmetric information regarding synergy gains. Our results are robust after controlling for several target and deal characteristics.