Information asymmetry in international acquisitions: The role of information institutions

Drawing on the information asymmetry theory (Akerlof, 1970) and new institutional economics (North, 1990), we argue that a host countrys information institutions, defined as the rules governing corporate disclosure, have a significant impact on the cost of information in international acquisitions, and that high information asymmetry leads to potential adverse selection problems and hurts the acquirers market performance. Our empirical results show that the capital market reacts negatively to institution-based information asymmetry in international acquisitions. This negative reaction is more significant for inexperienced acquirers and firms making unrelated acquisitions. In addition, when information institutions are poor, firms choosing partial acquisitions perform better than those choosing full acquisitions. Overall, this study contributes to the information asymmetry theory by bridging macro institutional contexts with micro firm- and transaction-level factors, thus providing a more comprehensive analysis for the information problems involved in international acquisitions.