In this dissertation, I examine whether low transparency (LT) firms have more market-timing opportunities and are able to earn higher market-timing profits than high transparency (HT) firms in two separate essays: 1) Essay on Transparency in Mergers Market and 2) Essay on Market-Timing Ability of Low Transparency Firms through Stock Repurchase Activities.
LT firms have more information asymmetry problems (Diamond and Verrechia (1991)), while information asymmetry can make stock valuation of LT firms more difficult . As some investors underestimate the value of the LT firms, others may overestimate the value of the LT firms. Therefore, LT firms can have higher price dispersion and larger magnitude of mispricing. In addition, the risk-averse investors will discount the stock of LT firms when the perceived information risk increases. Therefore, the magnitudes of price dispersion and price discount are both positively correlated with the level of information asymmetry problems. In essay one, I examine whether the combination of price dispersion and price discount caused by higher information asymmetry will allow LT firms to have more market-timing opportunities and to demand higher acquisition premiums in the acquisition market. In essay two, I examine whether the price discount and larger magnitude of mispricing provide LT firms with more market-timing opportunities and higher profits through stock repurchase activities.
Based on my analysis in essay one, I find that LT firms in fact are more likely to receive takeover offers during cold acquisition season. However, LT targets without enough negotiating power are often acquired at discount, while LT targets with enough negotiating power can demand higher acquisition premiums. Most importantly, the long-term performance indicates that buying (selling) high negotiating power, high book-to-market, and large HT (LT) targets can earn significant long-term profits. Therefore, while majority of existing studies have found HT to be more advantageous, I find poor performers, proxied by book-to-market ratio, with enough negotiating power can sell the firms at higher value than their true intrinsic value by remaining less transparent.
Based on the analysis in essay two, LT firms are more likely to announce open market repurchases and fixed-price tender offers than HT firms. In addition, LT firms are more likely to announce larger repurchase programs and to carry out the announced repurchase programs. This indicates less immediate and less complete price adjustment at announcement for LT firms and therefore more market-timing opportunities and profits for the LT firms. The long-term performance analysis confirms the hypothesis that LT firms are more successful at timing the repurchase of undervalued stock. Results based the open market repurchase sample are the strongest of all.
