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Mergers under Asymmetric Information Is there a Lemons Problem?


Borek, Thomas; Buehler, Stefan; Schmutzler, Armin (2004). Mergers under Asymmetric Information Is there a Lemons Problem? Working paper series / Socioeconomic Institute No. 408, University of Zurich.

Abstract

We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.

Abstract

We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:D43, D82, L13, L33
Language:English
Date:July 2004
Deposited On:29 Nov 2011 22:32
Last Modified:07 Dec 2017 10:12
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html

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