Information Asymmetry and Bidders' Gains


  • They are very grateful for the particularly helpful suggestions of an anonymous referee whose comments have significantly improved this paper. The comments and suggestions of seminar participants on earlier versions of this paper at the University of Cambridge, University of Bristol and Chulalongkorn University are also gratefully acknowledged.

* Address for correspondence: Krishna Paudyal, Centre for Empirical Research in Finance, Durham Business School, Durham University, Mill Hill Lane, Durham DH1 3LB, UK. e-mail:


Abstract:  Undervalued firms with high information asymmetry may announce takeover bids to attract the attention of investors with a view to increasing the share price through revaluation. Announcement period returns to such bidders should include both revaluation and synergy gains although the revaluation gains should be confined to early bids and decline with the number of bids announced within a reasonable period. Our results offer strong support to these predictions. Undervalued firms with high pre-bid information asymmetry gain the most from early bids and the gains decline with the number of bids announced. These findings are robust to methods of payment, relative size of deals, target status, relatedness of businesses, domicile of target, M&A activities and alternative measures of information asymmetry, and confirm that gains from early bids include revaluation as well as synergy gains, especially in the cases of undervalued firms with high information asymmetry.