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A Theory of Takeovers and DisinvestmentStewart C. MyersMassachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER) Bart M. LambrechtLancaster University - Management School January 2005 NBER Working Paper No. w11082 Abstract: We present a real-options model of takeovers and disinvestment in declining industries. As product demand declines, a first-best closure level is reached, where overall value is maximized by shutting down the .rm and releasing its capital to investors. Absent takeovers, managers of unlevered firms always abandon the firm's business too late. We model the managers' payout policy absent takeovers and consider the effects of golden parachutes and leverage on managers' shut-down decisions. We analyze the effects of takeovers of under-leveraged firms. Takeovers by raiders enforce first-best closure. Hostile takeovers by other firms occur either at the first-best closure point or too early. We also consider management buyouts and mergers of equals and show that in both cases closure happens inefficiently late.
Number of Pages in PDF File: 45 working papers seriesDate posted: February 23, 2005Suggested CitationContact Information
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