The role of real options in the takeover premia in mergers and acquisitions

Leonidas G. Barbopoulos, Louis T.W. Cheng, Yi Cheng and Andrew Marshall

International Review of Economics & Finance, 2019, vol. 61, issue C, 91-107

Abstract: This paper applies a real option framework to suggest that the takeover premia in mergers and acquisitions can be influenced by (a) the pre-bid ownership of target and (b) the real option characteristics of both acquirer and target firms. Our findings show that pre-bid ownership reduces the takeover premia, which is consistent with the argument that pre-bid ownership reduces information asymmetry. However, we find that the takeover premia is higher when both the acquirer and target firms exhibit real option capacity as measured by positive risk-return sensitivity. As a result, an acquirer with real option capacity is willing to pay higher takeover premia for an option embedded in the target firm.

Keywords: Real options; Takeover premia; Acquirer abnormal returns; Target abnormal returns (search for similar items in EconPapers)
JEL-codes: G12 G14 G30 G34 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:61:y:2019:i:c:p:91-107

DOI: 10.1016/j.iref.2019.01.006

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