Capital misallocation is a crucial factor that hinders the high-quality development of the capital market. Taking mergers and acquisitions (M&A) cases of Chinese listed companies from 2007 to 2019 as samples, this study finds that there is a mismatch between the target firm’s profit quality and the M&A premium. Moreover, based on the dual perspective of acquirer and target motivations, this study demonstrates that the target firm’s insufficient motivation to improve its information quality is the primary cause of a capital mismatch. Factors that can enhance the motivation of the target, such as improving financial services and facilitating labour flow, are the cure for capital misallocation. It is a crucial study to understand China’s capital misallocation and of great theoretical and practical significance to understand the combination of efficient markets and effective governments in emerging markets.

In this paper, we test the relationship between information asymmetry and acquisition premium in the mergers and acquisitions of the emerging market firms. Based on a sample of the domestic and cross-border acquisitions in twenty emerging countries between 1990 and 2007, we found a strong positive relationship between the acquisition premium paid to the target firms and the level of information asymmetry of the target firms. In addition, we found that higher level of information asymmetry leads to less cash payment and higher propensity of acquiring majority control (>50%) in the target firms. This evidence supports the theory that acquiring majority control is important in high asymmetric information environment. Thus, the higher the information asymmetry the higher is the premium paid by bidding firms in order to obtain majority control in the target firms. In addition, target firms with high information asymmetry have more valuable private information resources that are not accessible to the public investors. Acquiring firms may pay higher premium for such valuable information resources. The hypothesis is supported by the evidence of both the domestic and the cross-border acquisitions in the emerging markets.