Premium
Resolving Information Asymmetry Through Contractual Risk Sharing: The Case of Private Firm Acquisitions
Author(s) -
JANSEN MARK
Publication year - 2020
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12335
Subject(s) - information asymmetry , private information retrieval , business , adverse selection , audit , financial statement , finance , accounting , industrial organization , monetary economics , economics , statistics , mathematics
ABSTRACT When private firms are acquired, buyers commonly rely on seller financing and earnouts. Using a novel database of private acquisitions, I find that seller financing and earnouts become more common as information asymmetry increases between the acquirer and the target. Financial statement audits of the targets attenuate these results, which suggests that audits decrease information asymmetry in firm acquisitions. Seller‐financed acquisitions also close faster and at higher prices, reducing the private firm discount. These findings suggest that these contract structures are an important channel through which privately held firms mitigate adverse selection that arises from information asymmetry.