Private Equity Transactions and Information Asymmetry
Date
2017
Authors
Osborne, Sarah Elise
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Abstract
Neoclassical conventions surrounding private equity investments
by scholars and practitioners recognise the importance of private
equity in capital markets as an alternative investment class. The
complexities of private equity investments, including information
asymmetries and informed trading, have led to continued
regulatory debate over the stringency of existing legislation
addressing private equity investments in the United States. Most
recently, the issue of deregulation following the enactment of
increased regulation following the Global Financial Crisis (GFC)
has received increased attention in financial circles. Private
equity investment waves mirror economic cycles but also encompass
investor confidence that is believed to increase parallel with
regulation that addresses information asymmetries and informed
trading in the sector.
This dissertation addresses the research gap by investigating
whether information asymmetry exists around private equity
takeovers compared to tender/merger takeovers through the
analysis of cumulative abnormal returns around the announcement
date. Next, the probability of informed trade around the
announcement date due to deal specifics of takeover negotiations
between takeover types is determined. Finally, an analysis of the
complexities of private equity regulation in light of market
efficiency and systematic risk is considered. Using a dataset of
1,750 private equity and tender/merger offer takeovers in the
United States between 1994 and 2014, this study investigates
prior and current theorem regarding the differences between
financial and strategic takeovers across three key market
concerns: information asymmetry, informed trading, and regulatory
environment.
The results suggest that, in line with the neoclassical view,
private equity takeovers show higher cumulative returns
immediately before and after the announcement day; however there
is no omitted variables selection issue with acquirers
emphasizing financial particulars of importance in takeover
decisions. In addition, this study finds that there is informed
trading around the announcement date. This is likely due to the
nature of the private equity transactions, with transactions
encompassing information sharing between the target and the
acquirer pre-bid. Lastly, this study provides arguments for the
deregulation of the private equity market from neoclassical
capital market regulation. Private equity transactions are
complex, and by their nature, risk averse, thus making stringent
reform following periods of crisis restrictive on market
efficiency and growth.
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Keywords
Private Equity, Cumulative Abnormal Returns, Regulation, Market Efficiency, Systematic Risk, Capital Markets, Takeovers, Informed Trade
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