Essays on the effects of information transfer on acquisition performance.

Abstract

This dissertation consists of three essays that study different aspects of the acquisition performance from the perspective of information transfer between investment banks and firms. The first essay addresses the effects of the acquirer's abilities to gather and process information on the acquisition performance. While firms with high levels of both information-gathering and information-processing capabilities are expected to make better acquisitions, the firms with low information-processing capability may experience worse acquisition performance as their information-gathering capability increases. Similarly, the firm with low ability to gather acquisition-related information may exhibit worse acquisition performance as its ability to generate new acquisition decision rules increases. The second essay is an empirical study on the acquirer's acquisition performance as a function of its network relationships with investment banks. Investment banks often serve as conduits of novel and customized acquisition information. Acquirers may benefit from having access to both kinds of information. The firm's weak relationships with investment banks can be a source of novel information, while stronger relationships with banks can provide more customized information. I find that acquirers with a mix of strong and weak ties to the banks tend to perform better then the acquirers with either exclusive tie to one bank or multiple weak relationships to numerous banks. The acquirer's relationship with its financial advisor also influences the acquisition performance: the acquirers with intermediate strength of the relationship tend to perform better. The third essay studies how the strength of the cross-over ties between investment banks, acquirers and targets affects the acquisition performance. I find that when the acquirer retains a bank that has an established relationship with the target, the acquirer performance may decline. A similar result is found for the target firm that retains a bank with an established relationship to the acquirer. At the same time, during slow-downs in the investment banking industry, the banks are more likely to behave opportunistically towards their existing network partners.