When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs

Financial Management, 43(2), 445-466

40 Pages Posted: 26 May 2013 Last revised: 16 Jan 2016

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Date Written: April 19, 2013

Abstract

I introduce and test a method to identify market expectations about value creation in mergers. Post-announcement market prices reflect beliefs about both merged and standalone firm values, and the likelihood of either outcome. Stock prices alone do not contain sufficient information to identify these latent beliefs. By adding exchange-traded stock option data, I deliver a clear decomposition of observed value change into two parts: value creation and new information about standalone value. Previous research has struggled to disentangle the two. This decomposition provides a strong and practical measure of the market’s expectations about value creation in a merger.

Keywords: Mergers, options, financial markets

JEL Classification: G34, G13

Suggested Citation

Borochin, Paul, When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs (April 19, 2013). Financial Management, 43(2), 445-466. Available at SSRN: https://ssrn.com/abstract=2269910

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

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