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Stock Returns in Mergers and Acquisitions
Dirk Hackbarth University of Illinois at Urbana-Champaign Erwan Morellec Swiss Finance Institute; Swiss Federal Institute of Technology Lausanne October 2006 Swiss Finance Institute Research Paper No. 06-1 EFA 2006 Zurich Meetings Paper Abstract: This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the time period surrounding control transactions. Using a sample of 1090 takeovers of publicly traded US firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions.
Keywords: takeovers, real options, stock returns, firm-level betas JEL Classifications: G13, G14, G31, G34 Working Paper SeriesDate posted: March 03, 2006 ; Last revised: November 07, 2006Suggested CitationContact Information
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