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

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

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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.
Original languageEnglish
Pages (from-to)91-107
Number of pages17
JournalInternational Review of Economics and Finance
Volume61
Early online date19 Jan 2019
DOIs
Publication statusPublished - 1 May 2019

Keywords

  • real options
  • takeover premia
  • acquirer abnormal returns
  • target abnormal returns

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