Resolving Information Asymmetry Through Contractual Risk Sharing: The Case of Private Firm Acquisitions

This paper uses a proprietary transaction database to provide evidence about how information asymmetries and capital constraints affect deal structures in the sale of privately held firms. The evidence indicates that sellers of firms with greater levels of private information are more likely to receive seller financing as a form of contingent payment to help mitigate information asymmetry concerns. The evidence also suggests that seller financing helps alleviate buyer capital constraints in the financing of the transaction. Seller financing is more common in geographic areas where private equity capital commitments are lower.The online appendix for this paper is available at: http://ssrn.com/abstract=2853687.