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Acquisitions as a real options bidding game

Han Smit (jsmit@few.eur.nl), Ward van den Berg and Wouter De Maeseneire

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper uses a unified treatment of real options and game theory to examine the occurrence of bidding contests within a competitive environment of imperfect information and asymmetric bidders. Competing potential buyers may sequentially perform due diligence and incur costs (option premium) to become informed about their firm-specific target value (underlying value) before making a bid (exercise price). The first player’s bid reveals a signal on its own and the rival’s target value, thereby affecting the value of the rival’s option to bid on the target and the probability of a bidding contest. We find that bidding contests are more likely to take place between moderately correlated buyers, whereas rather diverse or just very similar buyers are less likely to compete.

Pages: 58 pages
Date: 2005-01
New Economics Papers: this item is included in nep-acc and nep-gth
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Citations: View citations in EconPapers (2)

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