The Dynamics of Mergers and Acquisitions

Erwan Morellec () and Alexei Zdhanov ()
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Erwan Morellec: HEC, University of Lausanne and FAME
Alexei Zdhanov: University of Rochester

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: This paper presents a dynamic model of takeovers based on the stock market valuations of merging firms. The model incorporates competition and imperfect information and determines the terms and timing of takeovers by solving option exercise games between bidding and target shareholders. The implications of the model for returns to stockholders are consistent with the available evidence. Notably, the model predicts that (1) returns to target shareholders should be larger than returns to bidding shareholders, and (2) returns to bidding share-holders can be negative if there is competition for the acquisition of the target. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns and to the dispersion of beliefs regarding the benefits of the takeover.

Keywords: takeovers; real options; competition; learning. (search for similar items in EconPapers)
JEL-codes: G13 G34 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-com and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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