Bid-ask spread, information asymmetry and acquisition of oil and gas assets

There are few empirical tests that support the existence of information asymmetry. We add to this literature using bid-ask spread to capture differences in the level of information asymmetry just prior to the announcement of an open market acquisition of acreage or reserves by U.S. oil and gas firms over the period 1993 to 2011. Acreage is an area of land that is believed to contain reserves and so information asymmetry is expected to be greater around announcement of acreage than for reserve acquisition. We find that for an oil and gas producer, the bid-ask spread just prior to announcement of acquisition of acreage is greater than the bid-ask spread just prior to the announcement of an acquisition of reserves. We then split the sample into firms with share price less than $4.00 (small share price firms) and the remainder (high share price firms). We find that this effect is associated with small share price firms and not high share price firms. Thus, for the firms with share price less than $4.00, the level of information asymmetry associated with an oil and gas firm varies with the type of asset acquisition announcement though this is not so apparent for the firms having a share price of $4.00 or more. Crown Copyright (C) 2015 Published by Elsevier B.V. All rights reserved.