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Adverse selection and M&A design: The roles of alliances and IPOs

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  • Reuer, Jeffrey J.
  • Ragozzino, Roberto

Abstract

This paper investigates strategic alliances and initial public offerings (IPOs) as factors that potentially mitigate the risk of adverse selection in acquisitions. It is hypothesized that prior alliances between acquirers and targets as well as IPOs undertaken by targets reduce adverse selection in M&A. Examining the consideration used in M&A transactions to reflect the allocation of overpayment risk, we find that targets' prior alliances with acquirers and targets' IPOs reduce the likelihood of using stock, or the amount of stock used, to finance acquisitions. We also present evidence that alliances and IPOs substitute for one another.

Suggested Citation

  • Reuer, Jeffrey J. & Ragozzino, Roberto, 2008. "Adverse selection and M&A design: The roles of alliances and IPOs," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 195-212, May.
  • Handle: RePEc:eee:jeborg:v:66:y:2008:i:2:p:195-212
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    Cited by:

    1. Raff, Horst & Ryan, Michael & Stähler, Frank, 2009. "Whole vs. shared ownership of foreign affiliates," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 572-581, September.
    2. repec:eee:tefoso:v:120:y:2017:i:c:p:334-346 is not listed on IDEAS
    3. Ma, Tingting & Zhang, Yi & Huang, Lu & Shang, Lining & Wang, Kangrui & Yu, Huizhu & Zhu, Donghua, 2017. "Text mining to gain technical intelligence for acquired target selection: A case study for China's computer numerical control machine tools industry," Technological Forecasting and Social Change, Elsevier, vol. 116(C), pages 162-180.
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    5. Woltering-Lamers, Philipp, 2011. "Die sequenzielle Organisationswahl: Kooperationen als Vorstufe von Akquisitionen," Arbeitspapiere 122, University of Münster, Institute for Cooperatives.
    6. Chondrakis, George, 2016. "Unique synergies in technology acquisitions," Research Policy, Elsevier, vol. 45(9), pages 1873-1889.
    7. Ahmed, Yousry & Elshandidy, Tamer, 2016. "The effect of bidder conservatism on M&A decisions: Text-based evidence from US 10-K filings," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 176-190.
    8. repec:bla:stratm:v:38:y:2017:i:3:p:609-625 is not listed on IDEAS
    9. Valérie Revest & Alessandro Sapio, 2016. "Graduation and sell-out strategies in the Alternative Investment Market," Discussion Papers 4_2016, CRISEI, University of Naples "Parthenope", Italy.
    10. Albert Jolink & Eva Niesten, 2012. "Hybrid Governance," Chapters,in: Handbook on the Economics and Theory of the Firm, chapter 12 Edward Elgar Publishing.
    11. Barbopoulos, Leonidas G. & Adra, Samer, 2016. "The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 283-294.
    12. Marciukaityte, Dalia & Roskelley, Kenneth & Wang, Hua, 2009. "Strategic alliances by financial services firms," Journal of Business Research, Elsevier, vol. 62(11), pages 1193-1199, November.
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    15. Abhirup Chakrabarti & Will Mitchell, 2016. "The role of geographic distance in completing related acquisitions: Evidence from U.S. chemical manufacturers," Strategic Management Journal, Wiley Blackwell, vol. 37(4), pages 673-694, April.
    16. Mata, José & Portugal, Pedro, 2015. "The termination of international joint ventures: Closure and acquisition by domestic and foreign partners," International Business Review, Elsevier, vol. 24(4), pages 677-689.
    17. Emilie R. Feldman & Stuart C. Gilson & Belén Villalonga, 2014. "Do analysts add value when they most can? Evidence from corporate spin-offs," Strategic Management Journal, Wiley Blackwell, vol. 35(10), pages 1446-1463, October.
    18. repec:eee:corfin:v:45:y:2017:i:c:p:31-63 is not listed on IDEAS

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