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A Reexamination of Diversification Premiums: An Information Asymmetry Perspective
Author(s) -
Chae Joon,
Jung JinYoung,
Yang CheolWon
Publication year - 2014
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12045
Subject(s) - information asymmetry , diversification (marketing strategy) , capital market , asymmetry , economics , monetary economics , capital (architecture) , business , financial economics , finance , marketing , physics , quantum mechanics , archaeology , history
Acquiring firms that earn positive abnormal returns on acquisitions may have internal capital markets that overcome the information asymmetry costs in less‐developed capital markets. In this paper, through an examination of data on 1064 acquiring firms in the K orean market from 1994 to 2011, we find that the highest acquiring returns occur when the firms with high information asymmetry acquire firms with low information asymmetry. To measure the degree of information asymmetry, we use the models of G losten– H arris (1988), Hasbrouck (1991) and Foster–Viswanathan (1993), which we selected from a variety of studies on market microstructure. We also find that the effect of information asymmetry on mergers and acquisitions ( M & A s) was larger before the Asian financial crisis of 1998, as well as before the global financial crisis of 2007, and that the K orean capital market was less developed before these crises than after them. We show that the internal capital market hypothesis holds for M & A s, and that information asymmetry is a strong determinant of M & A decisions in emerging markets.