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
Date Written: April 19, 2013
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: Suggested Citation