The joint determination of the payment method and the bid premium in M&As: What is the role of firm opacity?

This paper investigates how private information affects the joint determination of the payment method and the bid premium in M&As. The focus is on the uncertainty of the stand-alone valuations of the firms involved in the transaction induced by their opacity. First, we model M&A negotiations as a signalling game with two-sided private information and derive correlations between firm opacity and bid characteristics from equilibrium analysis. Then, we analyze a sample of U.S. deals, using an index based on market measures of adverse selection to quantify firm opacity. We find that the likelihood of stock offers and the bid premium increase with the target's opacity, while more opaque bidders are associated with fewer stock offers and smaller bid premiums.