Information Asymmetry in Acquisitions Lit Review

This page is referenced in:

• VC Acquisitions Paper

This page provides a sorted and annotated review of the literature on Information Asymmetry Measures.

Key/Cross-Group Papers

Dierkens 1991

@article{dierkens1991information,
  title={Information asymmetry and equity issues},
  author={Dierkens, N.},
  journal={Journal of Financial and Quantitative Analysis},
  volume={26},
  number={2},
  pages={181--199},
  year={1991},
  publisher={Cambridge Univ Press},
  abstract={The paper examines the relevance of information asymmetry between the managers of the firm and the market for the equity issue process. It uses four proxies for information asymmetry and presents three groups of tests: cross-sectional regressions of the reaction at equity issue announcements, comparisons of information asymmetry before and after the announcements, and analyses of the timing behavior observed during the equity issue process. The results show that information asymmetry is a significant variable for equity issues.},
  filename={Dierkens (1991) - Information Asymmetry And Equity Issues.pdf}
}

Dierkins uses 4 measures:

• We measure the market's reaction at the earnings announcement by lAan, the standard deviation of the market-adjusted, three-day abnormal return at the announcement of the quarterly earnings, computed over all the quarterly earnings announcements available during the five years preceding the equity issue announcement.
• We use the residual volatility of the equity of the firm: ... defined as the market-adjusted residual variance (standard deviation) of the daily stock price abnormal returns for the year preceding the equity issue announcement.
• We measure the intensity of public announcements made about the firm by the number of public announcements published in the Wall Street Journal The measure of IA, DNBan, is a dummy variable set equal to 1 when the firm has 16 or fewer announcements listed in the WSJI for the year prior to the equity issue announcement.
• The volume of trading in the shares of the firm is another potential measure of IA often suggested in the literature... We use RTRADE, the ratio of number of shares traded during the last year ending before the equity issue announcement, divided by the number of shares outstanding at the end of the fiscal year before the equity issue announcement. We choose to use intensity of trading, not total trading, because we want to exclude the impact of the size of the firm, checked independently. Two opposite predictions about trading and the IA can be represented in the framework intrbduced earlier. If the level of information asymmetry determines the volume (and intensity) of trading, trading will correlate positively with the information asymmetry through time. On the other hand, trading could release information and decrease the IA of the firm. Since the literature on trading is not sure of the direction of its influence, we will use trading without any a priori sign attached to it.

Clarke and Shastri 2001

@article{clarke2001information,
  title={On information asymmetry metrics},
  author={Clarke, J. and Shastri, K.},
  year={2001},
  abstract={The purpose of this paper is to provide a systematic empirical comparison of the different proxy variables used to measure information asymmetry. We construct different information asymmetry measures based on a firm’s growth opportunities, the market microstructure of the firm’s stock, and analysts’ forecasts of a firm’s earnings per share and examine their correlations under different sampling situations. We also study the ability of the microstructurebased measures, which can be calculated at any point in time, to detect trends in corporate finance proxies, which are measured quarterly. We find that the market microstructure measures tend to be highly correlated with one another. Moreover, they are related to firm characteristics that ex ante should be associated with information asymmetry. The market microstructure measures tend to be related to analyst forecast errors only for large, widely followed firms. Our results also indicate that monthly changes in the microstructure measures of information asymmetry are significantly correlated with annual changes in the corporate finance proxy variables.},
  filename={Clarke Shastri (2001) - On Information Asymmetry Metrics.pdf}
}

Measures:

• Analyst's Forecast Measures (data: First Call summary tape):
  • Forecast Error (Analysts over and under react): [math]ForecastError=\frac{|ACT_t-EST_t|}{|Act_t|}[/math]
  • Std. Deviation of forecasts (Correlated with riskiness): [math] ForecastSD=\frac{SD_t}{|Act_t|}[/math]
  • Number of estimates (Analysts attracted to firms with IA)
• Investment opportunity set:
  • Market-to-book of equity
  • Market-to-book of assets (0.95 correlation with Tobin's Q)
  • Earnings to price ratio
• Microstructure:
  • Bid Ask Spread (calculated from a model)

Moeller et al. 2007

@article{moeller2007diversity,
  title={How do diversity of opinion and information asymmetry affect acquirer returns?},
  author={Moeller, S.B. and Schlingemann, F.P. and Stulz, R.M.},
  journal={Review of Financial Studies},
  volume={20},
  number={6},
  pages={2047--2078},
  year={2007},
  publisher={Soc Financial Studies},
  abstract={We examine the theoretical predictions that link acquirer returns to diversity of opinion and information asymmetry. Theory suggests that acquirer abnormal returns should be negatively related to information asymmetry and diversity-of-opinion proxies for equity offers but not cash offers. We find that this is the case and that, more strikingly, there is no difference in abnormal returns between cash offers for public firms, equity offers for public firms, and equity offers for private firms after controlling for one of these proxies, idiosyncratic volatility. },
  filename={Moeller Schlingemann Stulz (2007) - How Do Diversity Of Opinion And Information Asymmetry Affect Acquirer Returns.pdf}
}

Measures:

• Using two proxies for diversity of opinion employed previously in the literature, the standard deviation of analyst forecasts and breadth of ownership, we show that...
• A firm’s idiosyncratic volatility can proxy for information asymmetry. We find this variable to be extremely helpful in understanding acquirer abnormal returns as predicted by information asymmetry models. In regressions explaining acquirer returns for acquisitions of public firms paid for with equity, the abnormal return falls as idiosyncratic volatility increases. When the proxies for diversity of opinion are added to regressions that already include idiosyncratic volatility as an explanatory variable, they are not significant.
• Dierkens (1991) explores the relation between abnormal returns for equity issues and proxies for the nature of the information environment. Her proxies are the standard deviation of the earnings announcement abnormal return, the firm’s idiosyncratic volatility, the firm’s turnover, and the number of public announcements of the firm. We use the first two of these as proxies for information asymmetry in our tests.
• Uses Tobin's Q, but not as an IA measure.
• In particular, we find that an increase in breadth of ownership leads to significantly higher returns for cash offers for public companies. Such a result could be understood if breadth-of-ownership proxies for information asymmetry since, in the presence of information asymmetry, a cash offer is good news about the value of the bidder’s common stock.
  • Breadth of ownership of the acquirer is the fraction of mutual funds that own the stock in the quarter prior to the acquisition. (Data source is not declared, but a reference puts it as: Mutual Fund Common Stock Holding/Transactions database obtained from CDA/Spectrum)
• When idiosyncratic volatility is added to the regression, dispersion of analyst forecasts is no longer significant... Finally, in regression (4) we add breadth of ownership and the mutual fund holding variable to regression (1). We find that breadth of ownership is not significant. It follows that idiosyncratic volatility dominates our proxies for diversity of opinion.

Krishnaswami and Subramaniam 1999

@article{krishnaswami1999information,
  title={Information asymmetry, valuation, and the corporate spin-off decision},
  author={Krishnaswami, S. and Subramaniam, V.},
  journal={Journal of Financial economics},
  volume={53},
  number={1},
  pages={73--112},
  year={1999},
  publisher={Elsevier},
  abstract={We empirically analyze the information hypothesis that the separation of a firm's divisions into independently traded units through a spin-off enhances value because it mitigates informationasymmetry about the firm. Consistent with this hypothesis, we find that firms that engage in spin-offs have higher levels of informationasymmetry compared to their industry and size matched counterparts and the information problems decrease significantly after the spin-off. The gains around spin-offs are positively related to the degree of informationasymmetry, and this relation is more pronounced for firms with fewer negative synergies between divisions. Finally, firms with higher growth opportunities and firms in need of external capital show a higher propensity to engage in spin-offs. They also raise more capital following a spin-off, which is consistent with the view that these firms mitigate informationasymmetry before approaching the capital market for funds.},
  filename={Krishnaswami Subramaniam (1999) - Information Asymmetry Valuation And The Corporate Spin Off Decision.pdf}
}

Measures of IA:

• The first is the forecast error in earnings measured before the announcement of the spin-off.
• The standard deviation of forecasts, which is measured as the standard deviation of all earnings forecasts made in the last month of the fiscal year preceding the spin-off announcement year.
• We compute a third measure of information asymmetry, the normalized forecast error, which is deffned as the ratio of the forecast error in earnings to the earnings volatility of the firm. Earnings volatility is the standard deviation of the firm's detrended quarterly earnings in the five-year period before the announcement of the spin-off.
• Following Dierkens (1991), we use the volatility in abnormal returns around earnings announcements as the fourth measure of information asymmetry about each firm.
• Finally, following Bhagat et al. (1985), Blackwell et al. (1990), and Krishnaswami et al. (1999), we use the residual volatility in daily stock returns as the fifth proxy for information asymmetry. The residual standard deviation is the dispersion in the market-adjusted daily stock returns in the year preceding the announcement of the spin-off.

Frankel and Li (2004)

@article{frankel2004characteristics,
  title={Characteristics of a firm's information environment and the information asymmetry between insiders and outsiders},
  author={Frankel, R. and Li, X.},
  journal={Journal of Accounting and Economics},
  volume={37},
  number={2},
  pages={229--259},
  year={2004},
  publisher={Elsevier},
  abstract={We examine how financial statement informativeness, analyst following, and news relate to the informationasymmetry between insiders and outsiders. Corporations’ timely disclosures of value relevant information and information collection by outsiders reduce informationasymmetry, limiting insiders’ ability to trade profitably on private information. We use the profitability and intensity of insider trades to proxy for informationasymmetry. We find that increased analyst following is associated with reduced profitability of insider trades and reduced insider purchases. Financial statement informativeness is negatively associated with the frequency of insider purchases. However, company news, good or bad, is positively associated with insider purchase frequency.},
  filename={Frankel Li (2004) - Characteristics Of A Firms Information Environment And The Information Asymmetry Between Insiders And Outsiders.pdf}
}

Quotes:

• "We use the profitability and intensity of insider trades to proxy for information asymmetry..." and "Given greater information asymmetry implies larger insider trading profits and value relevant financial statements, ceteris paribus, reduce information asymmetry, we expect a negative relation between the value relevance of financial statements and insider trading profits."

Measures:

• To assess the value relevance of financial statement information, we use the R2 from a regression of stock price on earnings and book value.
  • R-squared. We measure the informativeness of financial statements using the adjusted R2 from a firm-specific time-series regression. The regression model used is Pit = a + b1Eit + b2BVit + eit;
• Analyst following. Analysts play a significant role as intermediaries between managers and investors.
  • Our proxy for the intensity of analyst activity in a given firm-year is number of analysts following the firm. Number of analysts is a widely-used proxy for analyst activity in the accounting literature. For example, Bhushan (1989) uses analyst following as a proxy for the total resources spent on private information collection.
  • We measure analyst following using the I/B/E/S Summary Tape. For each firmcalendar- year we use the maximum number of analysts making one-year-ahead forecasts.
  • To avoid unnecessary deletion of observations with all other necessary data, we code firms missing from the I/B/E/S database after 1990 as having zero analysts. Prior to 1991 we code firms missing from the I/B/E/S database as having missing analyst data. Thus, we exclude such firms from the sample. This cut-off was chosen because I/B/E/S coverage has become more comprehensive over time.
• News coverage. The final source of information that we study is news coverage of firms. News unrelated to the announcement of financial statement information and analyst disclosures provides information to market participants and thus is expected to affect the degree of information asymmetry between managers and outsiders (Thompson et al., 1987; Mitchell and Mulherin, 1994).

To measure voluntary disclosure and press coverage for a firm, we search the ‘‘all news’’ category of the DJNR to identify the number of companyspecific news stories. For each firm-year we examine CRSP for availability of returns data between January 1, 1980 and December 29, 2000. We then search DJNR for all news articles on that company over the subinterval containing CRSP returns for that firm-year. Searches for a given company during a given firm-year are done using the company ticker symbol found in the CRSP database for that company during that time. The ‘‘all news’’ category of DJNR contains articles from approximately 6000 magazines, newspapers, and trade journals and includes the major business publications as well as the news wires generally used by companies to release news (i.e., PR News Wire and Business Wire). Thus, this measure incorporates both firm initiated disclosures such as new product announcements as well as reporter-initiated news items.

Probably the working paper of the above

@article{frankel2001characteristics,
  title={The characteristics of a firm's information environment and the predictive ability of insider trades},
  author={Frankel, R. and Li, X.},
  year={2001},
  abstract={This study examines the relation between the ability of insider trades to predict future returns and the availability of firm information. It investigates the marginal effect of three information sources: financial statements, analyst following, and firm information provided by voluntary disclosures or general news coverage. Timely disclosure of value relevant information reduces insiders' ability to trade profitably on private information. Investors acquire timely information from a variety of sources, and information provided by one source can affect the production of information by other sources. Thus, we examine these major sources simultaneously to understand the marginal effects of each. We find that the ability of insider trades to predict future returns diminishes in situations of increased analyst following and financial statement informativeness. However, we are unable to find a significant relation between the availability of company news and the predictive ability of insider trades. },
  filename={Frankel Li (2001) - The Characteristics Of A Firms Information Environment And The Predictive Ability Of Insider Trades.pdf}
}

Quotes: "The logic behind the use of insider trading as a proxy for information asymmetry is as follows. Insiders profit when they trade on value-relevant information before public disclosure leads to its full incorporation into stock prices. Thus, insider trading profits may be related to the degree of information asymmetry between managers and outside investors. Intuitively, insider trading profits should be zero if market participants have the same information as managers."

Measures:

• Our proxy for the intensity of analyst activity in a given firm-year is number of analysts following the firm. Number of analysts is a widely-used proxy for analyst activity in the accounting literature. For example, Bhushan (1989) uses analyst following as a proxy for the total resources spent on private information collection. The number of analysts making forecasts of one-year-ahead earnings for a firm varies over the firm’s fiscal year. For each firm-calendar-year we use the maximum number of analysts making one-year-ahead forecasts.
• To measure voluntary disclosure and press coverage for a firm, we search the “all news” category of the DJNR to identify the number of company-specific news events. For each firm-year we examine CRSP for availability of returns data between January 1, 1980 and December 29, 2000. We then search DJNR for all news articles on that company over the subinterval containing CRSP returns for that firm-year.
• We compute a net purchase ratio (NPR) similar to that of Lakonishok and Lee (2001) to measure insider trading activities in a given firm-month. NPR is computed by dividing the net purchases by managers in a given month by the total number of manager transactions over the same period. Net purchases are computed by subtracting the number of sale transactions from the number of purchase transactions in a given month.

Thomas (2002)

@article{thomas2002firm,
  title={Firm diversification and asymmetric information: evidence from analysts’ forecasts and earnings announcements},
  author={Thomas, S.},
  journal={Journal of Financial Economics},
  volume={64},
  number={3},
  pages={373--396},
  year={2002},
  publisher={Elsevier},
  abstract={Managers frequently cite the desire to mitigate asymmetric information as a motivation for increasing firm focus. The information benefits of focus appear relevant for the subset of firms that actually increase their focus; however, the relevance of focus-related information benefits for the population of diversified firms is an open question. This paper examines the relation between corporate diversification and asymmetric information proxies derived from analysts’ forecasts and abnormalreturns associated with earnings announcements. I find that greater diversification is not associated with increased asymmetric information. These results call into question the notion that corporate diversification strictly exacerbates information problems.},
  filename={Thomas (2002) - Firm Diversification And Asymmetric Information.pdf}
}

Quotes:

• "This paper examines the relation between corporate diversification and asymmetric information proxies derived from analysts’ forecasts and abnormal returns associated with earnings announcements."

Measures:

• I use the accuracy of consensus forecasts and the dispersion among forecasts as proxies for asymmetric information.8 These proxies are based on forecasts made in the month before actual earnings are released. I choose to analyze forecast characteristics for the shortest possible forecasting horizon in order to minimize the optimism bias that appears to exist in forecasts made at the beginning of a fiscal year (e.g., see O’Brien, 1988; Easterwood and Nutt, 1999). Additionally, Elton et al. (1984) demonstrate that the errors in forecasts made very near to the end of a forecasting period consist primarily of firm-specific information rather than economy- or industry-wide information. These factors make forecasts very near the end of a forecasting period attractive as proxies for assessing differences in asymmetric information across firms.
• As the primary measure of forecast accuracy, I use ERROR, which is the absolute difference between actual earnings and the median forecast deflated by the stock price five days before the earnings announcement date. Firms with larger differences in information asymmetry between managers and outsiders regarding firm earnings are expected to have larger forecast errors. DISPERSION is the standard deviation of analysts’foreca sts deflated by the stock price five days before the earnings announcement date. This variable is a measure of disagreement among analysts. Disagreement could result from a lack of available information about a firm. Thus, greater disagreement among analysts’foreca sts could imply larger information problems.
• As in Alford and Berger (1999), I include a measure of stock return volatility (VOLATILITY), calculated as the standard deviation of the market model residuals over the period from 210 to 11 days before the earnings announcement date. The volatility of stock prices proxies for the amount of pricerelevant information about a firm that arrives daily to the market Analysts might face more difficulty in forecasting earnings for firms with a lot of potential growth options relative to firms whose values consist mainly of assets-inplace. Thus, I also include in the analysis the ratio of R&D expense to sales (RDSALES) and the ratio of intangible assets to total assets at the previous fiscal year end (INTGTA).

Tetlock 2010

@article{tetlock2010does,
  title={Does public financial news resolve asymmetric information?},
  author={Tetlock, P.C.},
  journal={Review of Financial Studies},
  volume={23},
  number={9},
  pages={3520--3557},
  year={2010},
  publisher={Soc Financial Studies},
  abstract={I use uniquely comprehensive data on financial news events to test four predictions from an asymmetric information model of a firm's stock price. Certain investors trade on information before it becomes public; then, public news levels the playing field for other investors, increasing their willingness to accommodate a persistent liquidity shock. Empirically, I measure public information using firms' stock returns on news days in the Dow Jones archive. I find four patterns in postnews returns and trading volume that are consistent with the asymmetric information model's predictions. Some evidence is, moreover, inconsistent with alternative theories in which traders interpret news differently for rational or behavioral reasons.},
  filename={Tetlock (2010) - Does Public Financial News Resolve Asymmetric Information.pdf}
}

Measures:

• The primary data source is the DJ news archive, which contains all DJ News Service and all WSJ stories from 1979 to 2007. For each news story in the archive, there are often multiple newswire messages corresponding to separate paragraphs that DJ releases individually. I use the DJ firm code identifier at the beginning of each newswire to assess whether a story mentions a publicly traded U.S. firm. Unfortunately, my manual review of the news stories prior to November 1996 reveals that stories without any firm codes sometimes mention U.S. firms—i.e., the DJ firm codes contain measurement error. More seriously, DJ may back-fill firm codes prior to November 1996 in a systematic fashion that introduces survivorship bias into the data. This survivorship bias does not seem to affect stories after November 1996. Between 95% and 99% of sample firms have news coverage in each year after 1996.
• The controls for firm characteristics that predict expected returns include monthly measures of firm size (Sizei t ), book-to-market (BMi t ) ratio, yearly return momentum excluding the most recent calendar month (Momi t ), and average daily return volatility during the previous calendar month (TVoli t ) using standard techniques.
• Most regression specifications include abnormal turnover (Turni t ) to control for the high-volume return premium of Gervais, Kaniel, and Mingelgrin (2001). For consistency, I use the same turnover variable in the interaction terms below that measure volume-induced reversal. Thus, I use the abnormal turnover definition from Campbell, Grossman, and Wang (1993): the log of daily turnover (share volume over shares outstanding), detrended using a rolling 60-day average of log turnover.
• Four size-adjusted (SA) firm characteristics: stock illiquidity (IlliquiditySAi t ), analyst coverage (AnalystSAi t ), analyst forecast dispersion (DisperSAi t ), and institutional ownership (InstOwnSAi t ).
  • the illiquidity measure is the daily Amihud (2002) illiquidity measure averaged over trading day t – 4 through day t. The daily illiquidity measure is equal to 106 � |Reti t |/(Volumei t ), where Volumei t is the stock’s dollar volume.
  • Analyst coverage for each stock is the number of analysts with yearly earnings forecasts for that stock in the previous calendar month.
  • analyst forecast dispersion (Disperi t ) is the standard deviation of the one-year earnings per share forecasts in the previous calendar month divided by the contemporaneous stock price
  • Institutional ownership (InstOwni t ) is the sum of all institutional holdings divided by the firm’s market capitalization at the end of each calendar quarter (Source: Thomson 13(f))

Analysts Forecasts

Officer (2007)

@article{officer2007price,
  title={The price of corporate liquidity: Acquisition discounts for unlisted targets},
  author={Officer, M.S.},
  journal={Journal of Financial Economics},
  volume={83},
  number={3},
  pages={571--598},
  year={2007},
  publisher={Elsevier},
  abstract={This paper documents average acquisition discounts for stand-alone private firms and subsidiaries of other firms (unlisted targets) of 15% to 30% relative to acquisition multiples for comparable publicly traded targets. My results are strongly consistent with the notion that sale prices for unlisted targets are affected by both the need for, and availability of, the liquidity provided by the buyer. Corporate parents are significantly liquidity-constrained prior to the sale of a subsidiary, particularly when the subsidiary is being sold for cash. Furthermore, acquisition discounts are significantly greater when debt capital is relatively more expensive to obtain, and when the parent firm has below-market stock returns in the 12 months prior to the sale.},
  filename={Officer (2007) - The Price Of Corporate Liquidity.pdf}
}

Tags:

• Acquisitions of privately-held firms!

Quotes:

• "However, information asymmetry is a notoriously difficult construct to measure, and empirical proxies for asymmetric information are naturally imprecise. While I find only weak supporting empirical evidence, information asymmetry effects probably constitute a large fraction of the acquisition discount left unexplained by the liquidity proxies used in this paper."
• "...proxies for information asymmetry (such as the relative size of the target to the bidder and metrics for growth opportunities at the target firm—see, for example, Hansen, 1987; Martin, 1996) are relatively broad and imprecise, which adversely affects my ability to quantify the extent to which asymmetric information influences acquisition discounts. However, I do control for the method of payment in acquisitions when matching acquisitions of unlisted targets to portfolios of comparable publicly traded targets, and find that this control does not qualitatively influence my results. To the extent that bidders choose equity as a method of payment to mitigate information asymmetry problems (Hansen, 1987), the acquisition discount for unlisted firms is still apparent after controlling for the method of payment."

Measures:

• Matches on method of payment...
• The last independent variable in Table 7 is the coefficient of variation of analysts’ earning forecasts, which is a direct measure of information asymmetry that has been employed in the literature (Officer, 2004; Barry and Brown, 1985). I measure the coefficient of variation of earnings forecasts made closest but prior to the subsidiary sale, where all earnings forecasts are for the parent firm and for the quarter following the one in which the subsidiary sale is announced. This coefficient of variation therefore proxies for the extent of pre-sale differential information about the subsidiary’s parent.21 While the coefficient on the earnings forecast coefficient of variation in Table 7 is not statistically significantly different from zero (p-value ¼ 0.12), it does have the sign that would be expected if it were capturing the effect of information asymmetry—acquisition discounts are greater when information asymmetry is higher—and the variable does have a significantly negative coefficient in a univariate regression (not tabulated).

Lee (1992)

@article{lee1992management,
  title={Management buyout proposals and inside information},
  author={Lee, D.S.},
  journal={Journal of Finance},
  pages={1061--1079},
  year={1992},
  publisher={JSTOR},
  abstract={This paper explores stock price behavior surrounding withdrawn buyout proposals to determine whether managers' proposal announcements reveal any information which is unrelated to the efficiency gains associated with completed buyouts. On average, firms whose managers withdraw buyout proposals do not sustain significantly positive stock price effects unless they receive subsequent acquisition bids. In addition, managers of firms with completed buyouts are no more likely to have access to inside information than managers who withdrew proposals. I interpret this evidence as inconsistent with the notion that inside information commonly motivates management buyout proposals.},
  filename={Lee (1992) - Management Buyout Proposals And Inside Information.pdf}
}

Quotes:

• "Incentives to underbid (bid less than your reservation price) decrease as target shareholders' certainty of the post-takeover value increases, so bids are more likely to fail when information asymmetry is greater. This line of reasoning suggests that information asymmetry is more likely to be present in firms whose management buyout proposals were withdrawn due to shareholder or board resistance than in firms with completed proposals."

I examine four proxies of asymmetric information:

1. analyst following
2. number of wholly-owned subsidiaries (No data source reported)
3. firm size
4. market to book value ratio.

(All measurements are taken at the fiscal year-end preceding the firm's buyout proposal. I collect these measures from CRSP, Standard & Poor's Compustat Services, Moody's Corporate Reports, the Institutional Brokers Estimate System (I/B/E/S Inc.) and Nelson's Directory of Investment Research.)

Affleck-Graves et al. 2002

@article{affleck2002earnings,
  title={Earnings predictability, information asymmetry, and market liquidity},
  author={Affleck-Graves, J. and Callahan, C.M. and Chipalkatti, N.},
  journal={Journal of Accounting Research},
  volume={40},
  number={3},
  pages={561--583},
  year={2002},
  publisher={Wiley Online Library},
  abstract={We investigate the relation between earnings predictability, information asymmetry and the behavior of the adverse selection cost component of the bid-ask spread around quarterly earnings announcements for NASDAQ firms. While we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to quarterly earnings announcements for firms with less predictable earnings, we find no evidence of such changes for firms with more predictable earnings. During a non-announcement period, we find that firms with relatively less predictable earnings have consistently higher total bid-ask spreads than firms with more predictable earnings. This finding suggests that firms with relatively less predictable earnings have a higher cost of equity capital than comparable firms with more predictable earning streams, ceteris paribus. Hence, earnings predictability may be a legitimate concern of managers who wish to minimize their cost of equity capital at least as it pertains to bid-ask spreads.},
  filename={AffleckGraves Callahan Chipalkatti (2002) - Earnings Predictability Information Asymmetry And Market Liquidity.pdf}
}

Measures:

• We use both consensus analysts’ forecast errors and the dispersion of forecasts to measure earnings predictability. The consensus analysts’ forecast for a firm i in year y (CYFi,y , y=1984 to 1989) is the first consensus annual forecast dated after the year y-1 10-Kfiling date (Stice [1991])
• We then calculated the standardized absolute forecast error (SAFEi,y ) as follows: SAFEi,y =|(CYFi,y - AEPSi,y )/AEPSi,y
• We calculated the relative dispersion of analysts’ forecasts for the first consensus annual forecast issued after the year y-1 10-K report filing date using the standard deviation of analysts’ forecasts as reported by I/B/E/S: DAFi,y = (Standard Deviation of Analysts’ Forecasti,y )/|CYFi,y |.

Atiase and Bamber 1994

@article{atiase1994trading,
  title={Trading volume reactions to annual accounting earnings announcements: The incremental role of predisclosure information asymmetry},
  author={Atiase, R.K. and Bamber, L.S.},
  journal={Journal of accounting and economics},
  volume={17},
  number={3},
  pages={309--329},
  year={1994},
  publisher={Elsevier},
  abstract={This study provides empirical evidence regarding the effect of annual accounting earnings announcements on investors' trading behavior. We find that the magnitude of trading volume reaction is an increasing function of both the magnitude of the associated price reaction and the level of predisclosure information asymmetry. These results are consistent with Kim and Verrecchia's (1991a) theoretical trading volume proposition.},
  filename={Atiase Bamber (1994) - Trading Volume Reactions To Annual Accounting Earnings Announcements.pdf}
}

Measures:

• Sources: IBES, COMPUSTAT, CRSP
• Trading Vol. Measures:
  • Percentage of firm i’s shares traded on day t (Vit), cumulated over two different periods: the two-day period t = (- 1, 0), the seven-day period, t = (- 1, + 5).
  • MKTADJVOLI, = Vi, - Vmf
• IA proxies:
  • [math]DISP. = \frac{Standard deviation of analysts’ forecasts}{|Mean forecast|}[/math]
  • [math]RANGEi = \frac{Highest forecast - Lowest forecast}{|Mean forecast|}[/math]

Lobo and Tung 1997

@article{lobo1997relation,
  title={Relation between predisclosure information asymmetry and trading volume reaction around quarterly earnings announcements},
  author={Lobo, G.J. and Tung, S.},
  journal={Journal of Business Finance \& Accounting},
  volume={24},
  number={6},
  pages={851--867},
  year={1997},
  publisher={Wiley Online Library},
  abstract={This study investigates the effects of differences in predisclosure information asymmetry on trading volume reaction during quarterly earnings announcements. The analyses show that trading volume reaction to quarterly earnings announcements is positively related to the level of predisclosure information asymmetry and to the magnitude of the price reaction to the announcements. These results are consistent with Kim and Verrecchia's (1991a) theoretical trading volume proposition, and with Atiase and Bamber's (1994) tests of the proposition based on annual earnings announcements. This study also provides evidence on the relation of predisclosure information asymmetry and trading volume before and after quarterly earnings announcements.},
  filename={Lobo Tung (1997) - Relation Between Predisclosure Information Asymmetry And Trading Volume Reaction Around Quarterly Earnings Announcements.pdf}
}

Notes:

• Uses std dev of analysts' quarterly earnings forecasts and he difference between the most optimistic analysts' earnings forecast and the most pessimistic analysts' earnings forecasts for each sample firm to explain trading vol.

Stock return/volume measures

Utama and Cready 1997

@article{utama1997institutional,
  title={Institutional ownership, differential predisclosure precision and trading volume at announcement dates},
  author={Utama, S. and Cready, W.M.},
  journal={Journal of Accounting and Economics},
  volume={24},
  number={2},
  pages={129--150},
  year={1997},
  publisher={Elsevier},
  abstract={This study examines the relation between ownership structure, as revealed by the percentage of outstanding shares held by institutional investors, and trading volume at earnings announcement dates. We find that volume response as a function of institutional ownership is quadratic with the quadratic curve that reaches a maximum at around 50% institutional ownership. When risk tolerances are identical across investor types such a relation is consistent with Kim and Verrecchia's (1991a) proposition that trading volume response to public announcements increases with the level of cross-investor variation in precision of private predisclosure information.},
  filename={Utama Cready (1997) - Institutional Ownership Differential Predisclosure Precision And Trading Volume At Announcement Dates.pdf}
}

Notes:

• Uses volume (discusses forecasts):
• Diffculty with the use of the dispersion in analysts EPS forecasts as a measure of di¤erential precision is that it actually measures the divergent expectation of investors, which is inffuenced by the average precision of investors private predisclosure information in addition to differential precision. Therefore, the dispersion in analysts forecasts may encompass both di¤erential and average precision of investors

Measures:

• The model proposed by Kim and Verrecchia (KV) suggests that trading volume in response to a public disclosure depends on the level of di¤erential precision across investorsÕ private predisclosure information. The asymmetry in the precision of private predisclosure information causes investors to form expectations with di¤ering degrees of conÞdence. This diversity in conÞdence in turn induces variation in the amount of weight each investor places on the public signal.Highly conÞdent investors (i.e., investors with highly precise predisclosure information) place little weight on the new information while highly uncertain investors (i.e., investors with very little predisclosure information) place much more weight on it. This diversity in weighting of the public signal in turn induces volume.
• As in Bamber and Cheon (1995), we estimate the relative unexpected volume in the announcement period as the ratio of the announcement-period trading volume to the expected volume, which is the median non-announcement trading volume.
• Hence, we identify institutional ownership (INST) as the percentage of a firm's outstanding common shares held by institutional investors that is reported in the available Compact Disclosure disk dated on or after the month of the earnings announcement date.
  • We obtain institutional and large investor ownership data (used to assess the sensitivity of the reported results to how such investors are classiÞed) from the Spectrum section of the Compact Disclosure data base. The institutional data are constructed on the basis of the 13-F Þling with the Securities and Exchange Commission (SEC).10 Consistent with 13-F Þling requirements institutions are deÞned as entities other than natural persons with investment discretion over at least $100 million of equity securities. While Disclosure produces these data on a monthly basis, our source for these data obtained them on only an intermittent basis, acquiring the dataset once every two or three months. Hence, we identify institutional ownership (INST) as the percentage of a ÞrmÕs outstanding common shares held by institutional investors that is reported in the available Compact Disclosure disk dated on or after the month of the earnings announcement date. (E.g., the April 1994 disk was used for Þrm/announcements falling between 1 February 1994 and 30 April 1994 while the January 1994 disk was used for announcements occurring between 1 November 1993 and 31 January 1994.)

Accounting Measures

Development Stage (Sales < $500m) and R&D expenditure

Officer et al. 2009

@article{officer2009target,
  title={Target-firm information asymmetry and acquirer returns*},
  author={Officer, M.S. and Poulsen, A.B. and Stegemoller, M.},
  journal={Review of Finance},
  volume={13},
  number={3},
  pages={467--493},
  year={2009},
  publisher={Oxford University Press},
  abstract={We show that acquirer returns are significantly higher in stock-swap acquisitions of difficult-to-value targets, as measured by R&D intensity and idiosyncratic return volatility. This finding contributes to an explanation of the determinants of, and value gains from, using stock as a method of payment. The effects of target-valuation uncertainty on both the method of payment and the market reaction to acquisitions are more likely to be apparent in samples of private acquisitions, as these effects can be masked in samples of acquisitions of publicly held targets. Nevertheless, our results hold for publicly traded targets in multivariate analysis. },
  filename={Officer Poulsen Stegemoller (2009) - Target Firm Information Asymmetry And Acquirer Returns.pdf}
}

Measures:

• Two variables based on target accounting data that we use to proxy for the difficulty of valuing the target at the time of the acquisition: a “development stage” indicator variable and a continuous measure of the fraction of intangibles on the target firm’s balance sheet (intangibles divided by total assets). The development stage indicator variable is equal to one if the target has sales of less than $500,000 or if the firm’s R&D expenditures exceed sales.
• As a secondary proxy for the difficulty of target valuation that is available for most of our sample, we measure the amount of intangibles reported on the target firm’s balance sheet.
• We experiment with other proxies for the difficulty in valuing the target’s assets, including the age of the firm, whether a privately held target is covered in either Compustat or IBES, the impact of industry affiliation, and whether the bid for the private target is the first bid in the target’s industry in the past year (as in Song and Walkling, 2005).
• Specifically, the model in Hansen (1987) predicts that stock is more useful than cash in resolving information asymmetry when uncertainty or asymmetry is mostly about the target firm.

Tobin's Q, Sales Growth

Martin 1996

@article{martin1996method,
  title={The method of payment in corporate acquisitions, investment opportunities, and management ownership},
  author={Martin, K.J.},
  journal={Journal of Finance},
  pages={1227--1246},
  year={1996},
  publisher={JSTOR},
  abstract={This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership, but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher preacquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers.},
  filename={Martin (1996) - The Method Of Payment In Corporate Acquisitions Investment Opportunities And Management Ownership.pdf}
}

Quotes:

• "Consistent with Jung, Kim, and Stulz (1995), higher investment opportunities, whether measured using Tobin's q-ratio or historical sales growth, lead to a greater probability of stock financing"

This article uses three different variables to measure investment opportunities:

• Following prior studies, growth opportunities are first measured by the market-to-book ratio, denoted as Q to proxy for Tobin's q-ratio. The Q numerator is the sum of the acquiring firm's market value of equity, long-term debt, short-term debt, and preferred stock divided by book value of assets, calculated as of the fiscal year-end preceding the acquisition announcement date.
• The second variable used to measure growth opportunities in SALESGR5, the average annually compounded growth rate in sales over the five-year period preceding the year in which the acquisition is announced.
• The third variable recognizes that acquiring firms often experience a run-up in their stock prices prior to the acquisition (see Asquith, Bruner, and Mullins, 1983). This run-up may reflect recent increases in growth opportunities for the acquiring firm that lead to an increased use of stock financing. The variable PRECAR proxies for this run-up. PRECAR is the abnormal return cumulated over the 250 days preceding event day -5, where event day zero is the day the acquisition is announced in the Wall Street Journal. The market model, whose parameters are estimated over event days -500 through -301, is used to estimate the normal return on each event day.

Q (B2M), Size, Mgr-holdings, Feasibility of Cash

Emery and Switzer 1999

@article{emery1999expected,
  title={Expected Market Reaction and the Choice of Method of Payment for Acquistions},
  author={Emery, G.W. and Switzer, J.A.},
  journal={Financial Management},
  pages={73--86},
  year={1999},
  publisher={JSTOR},
  abstract={We hypothesize that a bidder's managers forecast the market's reaction to the announcement of an acquisition and choose the method of payment that they expect to provide the higher abnormal return. We find that most bidders chose the method of payment with the higher expected abnormal return although this result was stronger among the acquisitions for cash. In addition, the bidders that announced acquisitions for cash received actual abnormal returns that were higher than our estimate of what they expected if they announced an acquisition for stock. Our analysis reveals that the managers' choices were related to the effects of taxes and asymmetric information.},
  filename={Emery Switzer (1999) - Expected Market Reaction And The Choice Of Method Of Payment For Acquistions.pdf}
}

Measures:

• We used the target's market-to-book ratio, MKBK( T), and a measure of its size to represent the importance of the target management's information advantage. Our rationale is that a high market-to-book ratio indicates that a large proportion of the target's value is attributable to growth opportunities and that the target's managers are more likely than outsiders to know whethert hese opportunitiesw ill be realized.M artin (1996) used the same reasoning, arguing that the marketto- book ratio is a proxy for the Tobin's q ratio.
• The target manager's information advantage is particularly important if the target is large relative to the bidder. Therefore, we used SIZE, the ratio of the market value of the target's equity to the market value of the bidder's equity, to represent this effect. We obtained the market values of the target's and bidder's equity 60 days prior to the acquisition announcement from CRSP and the book values of equity for the year preceding the announcement from Compustat.
• We used MGR-OWN,the percentage of the bidder's shares owned by its managers, to represent the mangers' tendency to use their information advantage for the benefit of the existing shareholders. We obtained the market values of the target's and bidder's equity 60 days prior to the acquisition announcement from CRSP and the book values of equity for the year preceding the announcement from Compustat. The percentage of shares owned by a bidder's managers is drawn from the Value Line Investment Survey issue immediately preceding the acquisition announcement.
• We measured the feasibility of an acquisition for cash with SLACK, computed as one minus an estimate of the probability the bidder will become cash-insolvent within one year. We estimated the probability of cash insolvency by using the first term in Emery and Cogger's (1982) measure of a company's liquidity: SLACK = 1 - D [-(L + t)/Y ]

R&D

Aboody and Lev 2000

@article{aboody2000information,
  title={Information asymmetry, R\&D, and insider gains},
  author={Aboody, D. and Lev, B.},
  journal={The journal of Finance},
  volume={55},
  number={6},
  pages={2747--2766},
  year={2000},
  publisher={Wiley Online Library},
  abstract={Although researchers have documented gains from insider trading, the sources of private information leading to information asymmetry and insider gains have not been comprehensively investigated. We focus on research and development (R&D)-an increasingly important yet poorly disclosed productive input-as a potential source of insider gains. Our findings, for the period from 1985 to 1997 indicate that insider gains in R&D-intensive firms are substantially larger than insider gains in firms without R&D. Insiders also take advantage of information on planned changes in R&D budgets. R&D is thus a major contributor to information asymmetry and insider gains, raising issues concerning management compensation, incentives, and disclosure policies.},
  filename={Aboody Lev (2000) - Information Asymmetry R And D And Insider Gains.pdf}
}

Quotes:

• Barth, Kasznik, and McNichols (1998) report that analyst coverage (number of analysts following a firm) is significantly larger for firms intensive in R&D relative to firms with lower or no R&D, presumably because of the private information concerning R&D ' The uniqueness of R&D is widely recognized in economics and finance research. Thus, for example, Titman and Wessels (1988, p. 5) postulate that asset uniqueness is a determinant of corporate capital structure and measure uniqueness by R&D intensity, arguing that R&D "measures uniqueness because firms that sell products with close substitutes are likely to do less research and development since their innovations can be more easily duplicated. In addition, successful research and development projects lead to new products that differ from those existing in the market." 5 Griliches (1995, p. 77) notes: "A piece of equipment is sold and can be resold at a market price. The results of research and development investments are by and large not sold directly ... the lack of direct measures of research and development output introduces an inescapable layer of inexactitude and randomness into our formulation." Such randomness and inexactitude are obviously less severe to insiders than to outsiders. Information Asymmetry, R&D, And Insider Gains 2751 activities.

Measures:

• R&D expenditure (No vs. some, and low vs. high)
• The insider trading data analyzed in this study were obtained from CDA/Investnet.

Other

Capron and Shen 2007

@article{capron2007acquisitions,
  title={Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns},
  author={Capron, L. and Shen, J.C.},
  journal={Strategic Management Journal},
  volume={28},
  number={9},
  pages={891--911},
  year={2007},
  publisher={Wiley Online Library},
  abstract={The acquisition of privately held firms is a prevalent phenomenon that has received little attention in mergers and acquisitions research. In this study, we examine three questions: (1) What drives the acquirer's choice between public and private targets? (2) Do acquisitions of private targets elicit a more positive stock market reaction than acquisitions of public targets, which, on average, destroy value for acquirers' shareholders? (3) Do acquirers gain when their selection of a public or private target fits the theory? In this paper, we argue that the lack of information on private targets limits the breadth of the acquirer's search and increases its risk of not evaluating properly the assets of private targets. At the same time, less information on private targets creates more value-creating opportunities for exploiting private information, whereas the market of corporate control for public targets already serves as an information-processing and asset valuation mechanism for all potential bidders. Using an event study and survey data, we find that: (1) acquirers favor private targets in familiar industries and turn to public targets to enter new business domains or industries with a high level of intangible assets; (2) acquirers of private targets perform better than acquirers of public targets on merger announcement, after controlling for endogeneity bias; (3) acquirers of private firms perform better than if they had acquired a public firm, and acquirers of public firms perform better than if they had acquired a private firm. These results support the expectation that acquirer returns from their target choice (private/public) are not universal but depend on the acquirer's type of search and on the merging firms' attributes.},
  filename={Capron Shen (2007) - Acquisitions Of Private Vs Public Firms.pdf}
}

Notes:

• Choosing between public and private acquisition targets:
• Information asymmetry, search costs, and valuation difficulties are also likely to increase if targets have geographically dispersed activities. (Note: they don't measure distance in a continous var.)
• We modeled the acquirer’s propensity to acquire a private target as a function of the degree of information asymmetry that the acquirer faces. More precisely, we used a probit model to estimate the likelihood of private firm acquisition. The dependent variable is a binary variable that equals 1 when the target is private and 0 when the target is public. The independent variables are: ‘diversifying acquisition,’ ‘acquirer M&A experience in target industry,’ ‘target international scope,’ ‘target intangibles,’ and ‘target age.’

Transaction Measures

Cash vs. Stock

Chang 1998

@article{chang1998takeovers,
  title={Takeovers of privately held targets, methods of payment, and bidder returns},
  author={Chang, S.},
  journal={The Journal of Finance},
  volume={53},
  number={2},
  pages={773--784},
  year={1998},
  publisher={Wiley Online Library},
  abstract={We examine bidder returns at the announcement of a takeover proposal when the target firm is privately held. In stock offers, bidders experience a positive abnormal return, which contrasts with the negative abnormal return typically found for bidders acquiring a publicly traded target. On the other hand, bidders experience no abnormal return in cash offers. Our analysis suggests that the positive wealth effect is related to monitoring activities by target shareholders and, to an extent, reduced information asymmetries.},
  filename={Chang (1998) - Takeovers Of Privately Held Targets Methods Of Payment And Bidder Returns.pdf}
}

Tags:

• Acquisitions of privately-held firms!

Measures:

• Block-holdings
• Cash vs. stock

Hypotheses:

• Firms acquiring privately held targets through common stock exchanges tend to create outside blockholders because the targets are owned by a small group of shareholders. The creation of outside blockholders can increase firm value because these blockholders can serve as effective monitors of managerial performance or facilitate takeovers (Shleifer and Vishny (1986)).3 On the other hand, the resulting increase in ownership concentration can decrease firm value if it allows managerial entrenchment or makes takeovers more costly (Fama and Jensen (1983), Stulz (1988), and Morck, Shleifer, and Vishny (1988)).
  • ...a more relevant measure of the monitoring effects might be stock ownership of target shareholders as a group, as opposed to 5 percent block ownership by an individual shareholder.
• When firms offer stock to acquire publicly traded targets with a large number of shareholders, they can suffer from the asymmetric information problem of Myers and Majluf (1984). They demonstrate that issuing equity to the public reduces a firm’s stock price when managers have superior information. In the context of their model, bidding firm managers offer stock when they believe the firm is overvalued. Hence, the market reaction to the takeover proposal will be negative.
• On the other hand, when firms offer stock to acquire privately held targets with a small number of shareholders, the problem can be mitigated through the disclosure of bidding firm managers’ private information to the target shareholders. Further, the target shareholders have an incentive to assess the bidding firm’s prospect carefully because they will end up holding a substantial amount of the bidding firm’s stock after the merger. Thus, their willingness to hold a large block of shares conveys to the market favorable information about the bidding firm, resulting in a positive stock price reaction to the merger proposal.

Eckbo et al 1990

@article{eckbo1990asymmetric,
  title={Asymmetric information and the medium of exchange in takeovers: Theory and tests},
  author={Eckbo, B.E. and Giammarino, R.M. and Heinkel, R.L.},
  journal={Review of Financial Studies},
  volume={3},
  number={4},
  pages={651--675},
  year={1990},
  publisher={Soc Financial Studies},
  abstract={In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear cross-sectional regressions fail to support the model predictions. },
  filename={Eckbo Giammarino Heinkel (1990) - Asymmetric Information And The Medium Of Exchange In Takeovers.pdf}
}

Measures:

• Medium of exchange - cash vs. stock, stock mitigates IA problems.

Amihud et al 1990

@article{amihud1990corporate,
  title={Corporate control and the choice of investment financing: The case of corporate acquisitions},
  author={Amihud, Y. and Lev, B. and Travlos, N.G.},
  journal={Journal of Finance},
  pages={603--616},
  year={1990},
  publisher={JSTOR},
  abstract={We test the proposition that corporate control considerations motivate the means of investment financing-cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership.},
  filename={Amihud Lev Travlos (1990) - Corporate Control And The Choice Of Investment Financing.pdf}
}

Quotes:

• "Various researchers examined the relation between the method of financing and the abnormal returns on the bidders' stock at the acquisition announcement, where abnormal returns were assumed to indicate the existence of private information. The evidence suggests that bidders' abnormal returns are lower in stock financing relative to cash financing."

Measures:

• The method of payment, reported in Mergers and Acquisitions and confirmed against the Wall Street Journal's announcement, is represented by the variable PA Y: PA Y = 0 when the target firm was acquired for cash and/or notes, and PA Y = 1 when the acquiring firm exchanged its stock for that of the acquired firm.

Brown and Ryngaert 1991

@article{brown1991mode,
  title={The mode of acquisition in takeovers: Taxes and asymmetric information},
  author={Brown, D.T. and Ryngaert, M.D.},
  journal={Journal of Finance},
  pages={653--669},
  year={1991},
  publisher={JSTOR},
  abstract={We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model.},
  filename={Brown Ryngaert (1991) - The Mode Of Acquisition In Takeovers Taxes And Asymmetric Information.pdf}
}

Quotes:

• We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers.

Fuller et al. 2002

@article{fuller2002returns,
  title={What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions},
  author={Fuller, K. and Netter, J. and Stegemoller, M.},
  journal={The Journal of Finance},
  volume={57},
  number={4},
  pages={1763--1793},
  year={2002},
  publisher={Wiley Online Library},
  abstract={We study shareholder returns for firms that acquired five or more public, private, and/or subsidiary targets within a short time period. Since the same bidder chooses different types of targets and methods of payment, any variation in returns must be due to the characteristics of the target and the bid. Results indicate bidder shareholders gain when buying a private firm or subsidiary but lose when purchasing a public firm. Further, the return is greater the larger the target and if the bidder offers stock. These results are consistent with a liquidity discount, and tax and control effects in this market.},
  filename={Fuller Netter Stegemoller (2002) - What Do Returns To Acquiring Firms Tell Us.pdf}
}

Measures:

• Mostly considers cash vs. stock
• To the extent information asymmetry regarding the value of the acquirer is important in bids, we would expect to see patterns in the bids made close together in time, since the information asymmetry that exists at one point in time and its impact on bidders presumably would impact nearby bids in similar ways. From our original sample, we identify 1,115 paired acquisitions where the bidder acquired two targets within a three-month period. We expect acquirers to use the same method of payment for these transactions if the target and bid characteristics are similar. That is, if both targets are private firms, the bidder would use stock for both targets, all else held constant.

Carrow et al. 2004

@article{carow2004early,

 title={Do early birds get the returns? An empirical investigation of early-mover advantages in acquisitions},
 author={Carow, K. and Heron, R. and Saxton, T.},
 journal={Strategic Management Journal},
 volume={25},
 number={6},
 pages={563--585},
 year={2004},
 publisher={Wiley Online Library},
 abstract={We explore whether pioneering advantages exist for early-mover acquirers in industry acquisition waves by examining both combined (target and acquirer) and acquirer stock returns. Combined abnormal returns are higher for acquisitions that occur at the beginning of acquisition waves. However, for acquirers' returns, only strategic pioneers -those acting in manners consistent with having superior information - capture significant advantages. Specifically, early-mover acquirers who realize superior stock returns are those that conduct acquisitions in related industries, during industry expansionary phases, and finance their acquisitions as financial theory suggests they should when they possess an informational advantage with cash. Our findings extend the first-mover literature to corporate practices and link these practices to acquisition returns.},
 filename={Carow Heron Saxton (2004) - Do early birds get the returns.pdf}

}

Measures:

• Cash vs. Stock
• Tobin's Q
• Related Acquisition
• Acquirer's Experience

Eckbo and Thorburn 2000

@article{eckbo2000gains,
  title={Gains to bidder firms revisited: Domestic and foreign acquisitions in Canada},
  author={Eckbo, B.E. and Thorburn, K.S.},
  journal={Journal of Financial and Quantitative Analysis},
  volume={35},
  number={1},
  pages={1--25},
  year={2000},
  publisher={Cambridge Univ Press},
  abstract={We present large sample evidence on the performance of domestic and U.S. (foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are, on average, greatest for offers involving stock payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.},
  filename={Eckbo Thorburn (2000) - Gains To Bidder Firms Revisited.pdf}
}

Measures:

• Uses payment method

Yook 2003

@article{yook2003larger,
  title={Larger Return to Cash Acquisitions: Signaling Effect or Leverage Effect?*},
  author={Yook, K.C.},
  journal={The Journal of Business},
  volume={76},
  number={3},
  pages={477--498},
  year={2003},
  publisher={JSTOR},
  abstract={This article investigates the signaling theory and the benefit of debt theory to explain higher returns for bidders offering cash rather than stock, using Standard and Poor’s debt rating reviews and changes. Results imply that cash acquisitions and stock acquisitions have different sources of value creation. Benefit of debt seems to be the main source of value in cash acquisitions, whereas the synergy effect outweighs the leverage effect in stock takeovers. Although stock appears to be used for the most unsuccessful acquisitions, this study does not find convincing evidence that cash is used for good acquisitions.},
  filename={Yook (2003) - Larger Return To Cash Acquisitions.pdf}
}

Notes:

• Uses cash/stock
• Examines rating changes to acquisitions

Calvet and Lefoll 1987

@article{calvet1987information,
  title={Information asymmetry and wealth effect of Canadian corporate acquisitions},
  author={Calvet, AL and Lefoll, J.},
  journal={Financial Review},
  volume={22},
  number={4},
  pages={415--431},
  year={1987},
  publisher={Wiley Online Library},
  abstract={This study reports evidence on the wealth effects of bidders and targets involved in Canadian corporate acquisitions. It then examines whether wealth changes at the announcement time are consistent with the hypothesis that the payment method is a surrogate signal for bidder management's beliefs regarding the value of its firm. The findings support the value-maximizing hypothesis and indicate a stronger performance for both bidders and targets in cash takeovers than in acquisitions involving an exchange of securities—in accordance with the existence of asymmetric information and the tax effect resulting from the payment method.},
  filename={Calvet Lefoll (1987) - Information Asymmetry And Wealth Effect Of Canadian Corporate Acquisitions.pdf}
}

Notes:

• Uses method of payment.

Distance

Agarwal and Hauswald 2010

@article{agarwal2010distance,
  title={Distance and private information in lending},
  author={Agarwal, S. and Hauswald, R.},
  journal={Review of Financial Studies},
  volume={23},
  number={7},
  pages={2757--2788},
  year={2010},
  publisher={Soc Financial Studies},
  abstract={We study the effects of physical distance on the acquisition and use of private information in informationally opaque credit markets. Using a unique data set of all loan applications by small firms to a large bank, we show that borrower proximity facilitates the collection of soft information, leading to a trade-off in the availability and pricing of credit, which is more readily accessible to nearby firms albeit at higher interest rates ceteris paribus. Analyzing loan rates and firms’ decision to switch lenders provides further evidence for banks’ strategic use of private information. However, distance erodes our lender’s ability to collect proprietary intelligence and to carve out local captive markets, suggesting that the requisite soft information is primarily local. }
  filename={Agarwal Hauswald (2010) - Distance and private information in lending.pdf}
}

Notes:

• Not an acquisition paper
• Distance matters in lending in mitigating IA (seminal paper?)

Basu and Chevrier 2011

@article{basu2011distance,
  title={Distance, information asymmetry, and mergers: evidence from Canadian firms},
  author={Basu, N. and Chevrier, M.},
  journal={Managerial Finance},
  volume={37},
  number={1},
  pages={21--33},
  year={2011},
  publisher={Emerald Group Publishing Limited},
  abstract={Purpose – The purpose of this paper is to examine the impact of the distance between the acquiror and the target on merger outcomes.   Design/methodology/approach – The authors use the distance between acquiror and target headquarters for a sample of 134 Canadian mergers to proxy for the impact of information asymmetry due to distance. They use an ordinary least squares regression to examine the impact of this distance on the abnormal returns earned by the acquiror and the operating performance of the acquiror. They also use a logistic regression to test for the impact of distance on the choice of the medium of exchange.   Findings – The results suggest that a larger distance between the acquiror and the target is related to lower abnormal returns for the acquiror, poorer post-merger operating performance, as well as to a greater use of stock as the medium of exchange. The results are robust to several alternate specifications.   Research limitations/implications – The findings of this paper extend existing research that suggests that distance affects investment decisions. Moreover, by analyzing the choice of the medium of exchange, this paper provides evidence that indicates that the distance matters due to its impact on information. As such, the paper suggests a potential empirical approach to measuring information asymmetry. Future research could help us better understand the role of distance in various other aspects of corporate decision making.   Originality/value – This paper, by analyzing a sample of Canadian firms, provides an out-of-sample test for prior research that has focused almost exclusively on US firms. Moreover, by looking at the choice of the medium of exchange, it provides direct evidence that distance affects corporate decision making.},
  filename={Basu Chevrier (2011) - Distance information asymmetry and mergers evidence from Canadian firms.pdf}
}

Notes:

• Considers distance and cash vs. stock.

Measures:

• We follow Kedia et al. (2008) in defining dummy variables that identify local as opposed to distant mergers. The variables local 75, local100 and local150 are indicator variables that take on a value of 1 if the target and acquiror are within 75, 100 150 km of each other, respectively...

Market Microstructure

Most papers use the Kyle model, but some use later models, such as Easley's "PIT" (Probability of Informed Trade) model.

@article{chae2005trading,
  title={Trading volume, information asymmetry, and timing information},
  author={Chae, J.},
  journal={The Journal of Finance},
  volume={60},
  number={1},
  pages={413--442},
  year={2005},
  publisher={Wiley Online Library},
  abstract={This paper investigates trading volume before scheduled and unscheduled corporate announcements to explore how traders respond to private information. I show that cumulative trading volume decreases inversely to information asymmetry prior to scheduled announcements, while the opposite relation holds for volume after the announcement. In contrast, trading volume before unscheduled announcements increases dramatically and shows little relation to proxies for information asymmetry. I investigate the behavior of market makers and find that they act appropriately by increasing price sensitivity before all announcements, implying that they extract timing information from their order books.},
  filename={Chae (2005) - Trading Volume Information Asymmetry And Timing Information.pdf}
}

Notes:

• MMS paper... (Important - closed-end funds)

@article{ascioglu2008information,
  title={Information asymmetry and investment-cash flow sensitivity},
  author={Ascioglu, A. and Hegde, S.P. and McDermott, J.B.},
  journal={Journal of Banking \& Finance},
  volume={32},
  number={6},
  pages={1036--1048},
  year={2008},
  publisher={Elsevier},
  abstract={Models of capital market imperfections predict that information asymmetry increases the sensitivity of a firm’s investment expenditures to fluctuations in internal funds by making external capital more costly. Previous empirical tests of the link between investment and financing decisions have relied on indirect measures of the degree to which a firm becomes financially constrained due to market frictions. In contrast, we use more direct measures of informational frictions derived from the market microstructure literature. Consistent with the theoretical prediction, our analysis shows that the scaled investment expenditures of firms with greater informed trade have greater investment- cash flows sensitivity. We also find the relationship between investment-cash flow sensitivity as a function of informed trade is nonmonotonic. Our results are robust to multiple alternative measures of informed trade and liquidity.},
  filename={Ascioglu Hegde McDermott (2008) - Information Asymmetry And Investment Cash Flow Sensitivity.pdf}
}

Market Microstructure Measures (Source: NYSE TAC)

• [math]Effective Spread =2\frac{P_t-M_t}{M_t}[/math] Where M is the midpoint
• Many others, all need microstructure data.

@article{bhattacharya2008earnings,
  title={Earnings quality and information asymmetry: evidence from trading costs},
  author={Bhattacharya, N. and Desai, H. and Venkataraman, K.},
  year={2008},
  abstract={The adverse consequences of poor earnings quality have been the subject of significant debate among academics, practitioners and regulators. However, the empirical evidence on pricing implications of earnings quality is sparse and controversial. We examine one potential consequence of poor earnings quality - its impact on information asymmetry. We document that poor earnings quality increases the adverse selection risk as manifested in trading costs and lowers liquidity in financial markets. Both innate and discretionary components of earnings quality contribute significantly to information asymmetry. Further, poor earnings quality exacerbates information asymmetry around earnings announcements, especially for firms where earnings represent the principal source of information for market participants, suggesting that poor quality earnings offers a greater information advantage to informed traders. An important implication is that earnings quality can affect cost of capital via its impact on trading cost. Additionally, from a policy perspective, we show that earnings quality can lead to significant variation in information asymmetry even for firms within a uniform reporting regime.},
  filename={Bhattacharya Desai Venkataraman (2008) - Earnings Quality And Information Asymmetry Evidence From Trading Costs.pdf}
}

Measures:

• Our primary measure of earnings quality is the accruals quality metric used by Francis, LaFond, Olsson and Schipper (2004, 2005, hereafter FLOS)
• Percentage effective spread = 2 × Dit × (Priceit - Midit) / Midit × 100

Notes:

• Poor earnings quality results in SEC enforcement actions

@article{pevzner2007management,
  title={Management earnings forecasts, information asymmetry, and liquidity: an empirical investigation},
  author={Pevzner, M.},
  year={2007},
  abstract={This study investigates (1) whether forecasting firms have lower liquidity prior to the issuance of a management-earnings forecast than non-forecasting firms and (2) whether forecasting earnings has a persistent affect on a firm's liquidity. I find that, first, forecasting firms have greater liquidity in the period prior to a forecast. Second, while issuing forecast increases liquidity in over short windows, this effect is not significant over longer windows. Third, initiating or ceasing the issuance of earnings forecasts has no significant long-term effect on the firm's liquidity. Combined, these results suggest that management earnings forecasting decision does not appear to be driven by liquidity-improvement goals, and that management earnings forecasts do not appear to strongly affect firms' liquidity. },
  filename={Pevzner (2007) - Management Earnings Forecasts Information Asymmetry And Liquidity.pdf}
}

Measures:

• average daily transaction-based quoted bid-ask spreads and quoted depths - Amihud Illiquidity (Amihud (2002))
• trading volume
• Amihud Illiquidity (Illiq) [math]Illiqit= \frac{1}{N}\sum \frac{Ret_it}{Vol_it} 10^6[/math]
  • where N represents the number of days in the estimation period, Ret is the daily stock return, and Vol is the total number of shares traded during the day.
• Quoted Half Spreads: One half of absolute difference between best bid and ask price
• Quoted Depths: Sum of shares quoted on both bid and ask sides of the market

@article{chen2003bid,
  title={Bid-ask spreads, information asymmetry, and abnormal investor sentiment: evidence from closed-end funds},
  author={Chen, J.H. and Jiang, C.X. and Kim, J.C. and McInish, T.H.},
  journal={Review of Quantitative Finance and Accounting},
  volume={21},
  number={4},
  pages={303--321},
  year={2003},
  publisher={Springer},
  abstract={Using a sample of closed-end equity funds listed on the NYSE from 1994 to 1999, we investigate differences in spreads and adverse selection costs between the closed-end funds and a matched sample of common stocks.We find that spreads and adverse selection costs for the closed-end funds are significantly lower than those of control stocks. The results are consistent for the subperiods both before and after the minimum tick size change on NYSE on June 24, 1997. The differences of spreads and adverse selection costs cannot be attributed to the differences in the characteristics of the closed-end funds and the matched sample of common stocks. Lastly, we find that abnormal investor sentiment and adverse selection costs of closed-end funds are positively correlated over time.},
  filename={Chen Jiang Kim McInish (2003) - Bid Ask Spreads Information Asymmetry And Abnormal Investor Sentiment.pdf}
}

Notes:

• Closed-end funds - no useful measures but some important point (?)

@article{brennan1996market,
  title={Market microstructure and asset pricing: On the compensation for illiquidity in stock returns},
  author={Brennan, M.J. and Subrahmanyam, A.},
  journal={Journal of Financial Economics},
  volume={41},
  number={3},
  pages={441--464},
  year={1996},
  publisher={Elsevier},
  abstract={Models of price formation in securities markets suggest that privately informed investors create significant illiquidily costs for uninformed investors, implying that the required rates of return should be higher for securities that are relatively illiquid. We investigate the empirical relation between monthly stock returns and measures of illiquity obtained from intraday data. We find a significant relation between required rates of return and these measures after adjusting for the Fama and French risk factors, and also after accounting for the effects of the stock price level.},
  filename={Brennan Subrahmanyam (1996) - Market Microstructure And Asset Pricing.pdf}
}

Notes:

• No useful measures (MMS paper)

@article{brennan1998alternative,
  title={Alternative factor specifications, security characteristics, and the cross-section of expected stock returns},
  author={Brennan, M.J. and Chordia, T. and Subrahmanyam, A.},
  journal={Journal of Financial Economics},
  volume={49},
  number={3},
  pages={345--373},
  year={1998},
  publisher={Elsevier},
  abstract={We examine the relation between stock returns, measures of risk, and several non-risk security characteristics, including the book-to-market ratio, Þrm size, the stock price, the dividend yield, and lagged returns. Our primary objective is to determine whether non-risk characteristics have marginal explanatory power relative to the arbitrage pricing theory benchmark, with factors determined using, in turn, the Connor and Korajczyk (CK; 1988) and the Fama and French (FF; 1993b) approaches. FamaÐMac- Beth-type regressions using risk adjusted returns provide evidence of return momentum, size, and book-to-market e¤ects, together with a signiÞcant and negative relation between returns and trading volume, even after accounting for the CK factors. When the analysis is repeated using the FF factors, we Þnd that the size and book-to-market e¤ects are attenuated, while the momentum and trading volume e¤ects persist. In addition, Nasdaq stocks show signiÞcant underperformance after adjusting for risk using either method.},
  filename={Brennan Chordia Subrahmanyam (1998) - Alternative Factor Specifications Security Characteristics And The Cross Section Of Expected Stock Returns.pdf}
}

Notes:

• No useful measures (MMS paper)

@article{easley1996liquidity,
  title={Liquidity, information, and infrequently traded stocks},
  author={Easley, D. and Kiefer, N.M. and O'hara, M. and Paperman, J.B.},
  journal={Journal of Finance},
  pages={1405--1436},
  year={1996},
  publisher={JSTOR},
  abstract={This article investigates whether differences in information-based trading can explain observed differences in spreads for active and infrequently traded stocks. Using a new empirical technique, we estimate the risk of information-based trading for a sample of New York Stock Exchange (NYSE) listed stocks. We use the information in trade data to determine how frequently new information occurs, the composition of trading when it does, and the depth of the market for different volume-decile stocks. Our most important empirical result is that the probability of information-based trading is lower for high volume stocks. Using regressions, we provide evidence of the economic importance of information-based trading on spreads.},
  filename={Easley Kiefer Ohara Paperman (1996) - Liquidity Information And Infrequently Traded Stocks.pdf}
}

Notes:

• MMS model of information asymmetry.

@article{easley2002information,
  title={Is information risk a determinant of asset returns?},
  author={Easley, D. and Hvidkjaer, S. and O’hara, M.},
  journal={The Journal of Finance},
  volume={57},
  number={5},
  pages={2185--2221},
  year={2002},
  publisher={Wiley Online Library},
  abstract={We investigate the role of information-based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information-based trading, and we estimate this measure using data for individual NYSE-listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset-pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information-based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year.},
  filename={Easley Hvidkjaer Ohara (2002) - Is Information Risk A Determinant Of Asset Returns.pdf}
}

Notes:

• MMS model of information asymmetry.

Other

@article{nayyar1993stock,
  title={Stock market reactions to related diversification moves by service firms seeking benefits from information asymmetry and economies of scope},
  author={Nayyar, P.R.},
  journal={Strategic Management Journal},
  volume={14},
  number={8},
  pages={569--591},
  year={1993},
  publisher={Wiley Online Library},
  abstract={Service firms may seek benefits from information asymmetry and economies of scope by diversifying. Each source of benefit is based on different underlying mechanisms and each is affected differently by implementation difficulties and service characteristics. Previous research, however, has not analyzed the relative performance effects of these two very different sources of benefits for related diversified service firms. Thus, this paper uses an integrative framework including these aspects to examine the relative performance effects of benefits from information asymmetry and economies of scope in service firms.},
  filename={Nayyar (1993) - Stock Market Reactions To Related Diversification Moves By Service Firms Seeking Benefits From Information Asymmetry And Economies Of Scope.pdf}
}

Measures: (Surveyed firms on their service characteristics)

• Service firms may pursue two sources of benefits by diversifying. These are (1) information asymmetry and (2) economies of scope.
• The extent of information asymmetry varies with service characteristics. This effect can be examined by differentiating services in terms of three attributes: search, experience, and credence qualities
• Information asymmetry is higher for experience services than for search services

@article{king2008performance,
  title={Performance implications of firm resource interactions in the acquisition of R\&D-intensive firms},
  author={King, D.R. and Slotegraaf, R.J. and Kesner, I.},
  journal={Organization Science},
  volume={19},
  number={2},
  pages={327--340},
  year={2008},
  publisher={INFORMS},
  abstract={We explore the role of resource interactions in explaining firm performance in the context of acquisitions. Although we confirm that acquisitions do not lead to higher performance on average, we do find that complementary resource profiles in target and acquiring firms are associated with abnormal returns. Specifically, we find that acquiring firm marketing resources and target firm technology resources positively reinforce (complement) each other; meanwhile, acquiring and target firm technology resources negatively reinforce (substitute) one another. Implications for management theory and practice are identified. },
  filename={King Slotegraaf Kesner (2008) - Performance Implications Of Firm Resource Interactions In The Acquisition Of R And D Intensive Firms.pdf}
}

Tags:

• Complements and substitutes!

@article{chordia2001trading,
   title={Trading activity and expected stock returns},
   author={Chordia, T. and Subrahmanyam, A. and Anshuman, V.R.},
   journal={Journal of Financial Economics},
   volume={59},
   number={3},
   pages={32},
   year={2001},
   abstract={Given the evidence that the level of liquidity a!ects asset returns, a reasonable hypothesis is that the second moment of liquidity should be positively related to asset returns, provided agents care about the risk associated with #uctuations in liquidity. Motivated by this observation, we analyze the relation between expected equity returns and the level as well as the volatility of trading activity, a proxy for liquidity. We document a result contrary to our initial hypothesis, namely, a negative and surprisingly strong cross-sectional relationship between stock returns and the variability of dollar trading volume and share turnover, after controlling for size, book-to-market ratio, momentum, and the level of dollar volume or share turnover. This e!ect survives a number of robustness checks, and is statistically and economically signi"cant. Our analysis demonstrates the importance of trading activity-related variables in the crosssection of expected stock returns.},
   filename={Chordia Subrahmanyam Anshuman (2001) - Trading Activity And Expected Stock Returns.pdf}
 }

Notes:

• No mention of IA. But does consider many of the measures (trading vol, book-to-market, etc.) and ascribes them to liquidity.

@article{ittner2001assessing,
  title={Assessing empirical research in managerial accounting: a value-based management perspective},
  author={Ittner, C.D. and Larcker, D.F.},
  journal={Journal of accounting and economics},
  volume={32},
  number={1},
  pages={349--410},
  year={2001},
  publisher={Elsevier},
  abstract={This paper applies a value-based management framework to critically review empirical research in managerial accounting. This framework enables us to place the exceptionally diverse set of managerial accounting studies from the past several decades into an integrated structure. Our synthesis highlights the many consistent results in prior research, identifies remaining gaps and inconsistencies, discusses common methodological and econometric problems, and suggests fruitful avenues for future managerial accounting research.},
  filename={Ittner Larcker (2001) - Assessing Empirical Research In Managerial Accounting.pdf}
}

Notes:

• No measures used - is within firm. But mentions std measures...

@article{healy2001information,
  title={Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature},
  author={Healy, P.M. and Palepu, K.G.},
  journal={Journal of Accounting and Economics},
  volume={31},
  number={1},
  pages={405--440},
  year={2001},
  publisher={Elsevier},
  abstract={Financial reporting and disclosure are potentially important means for management to communicate firm performance and governance to outside investors. We provide a framework for analyzing managers’ reporting and disclosure decisions in a capital markets setting, and identify key research questions. We then review current empirical research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure. Our survey concludes that current research has generated a number of useful insights. We identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.},
  filename={Healy Palepu (2001) - Information Asymmetry Corporate Disclosure And The Capital Markets.pdf}
}

Notes:

• This is an accounting literature review. Might be useful for arguments.