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.
- real options
- takeover premia
- acquirer abnormal returns
- target abnormal returns
Barbopoulos, L. G., Cheng, L. T. W., Cheng, Y., & Marshall, A. (2019). The role of real options in the takeover premia in mergers and acquisitions. International Review of Economics and Finance, 61, 91-107. https://doi.org/10.1016/j.iref.2019.01.006