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Using Option Prices to Infer Overpayments and Synergies in M&A TransactionsKathryn BarracloughVanderbilt University - Finance David T. RobinsonDuke University - Fuqua School of Business; National Bureau of Economic Research (NBER) Tom SmithUniversity of Queensland; Financial Research Network (FIRN) Robert E. WhaleyVanderbilt University - Finance October 11, 2011 Vanderbilt Owen Graduate School of Management Research Paper No. 2012-02 Abstract: In this paper, we use call option prices to identify synergies and news from merger and acquisition (M&A) transaction announcements. We find that M&A announcements result in large and approximately equal gains to the bidder and the target on average, with the combined gains being large enough to justify the premium paid to target shareholders. On average, M&A announcements release good news about targets, but bad news about bidders. This suggests that market prices understate true synergy gains, and helps reconcile the generally negative market-based evidence on value-creation in takeovers with their continued prominence in everyday business strategy.
Number of Pages in PDF File: 47 Keywords: takeover offers, option-implied values for bidder and target gains and news JEL Classification: G30, G34, C51 working papers seriesDate posted: October 12, 2011 ; Last revised: December 12, 2012Suggested CitationContact Information
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