The Role of Real Options in the Takeover Premia in Mergers and Acquisitions

Posted: 16 Mar 2021

See all articles by Leonidas G. Barbopoulos

Leonidas G. Barbopoulos

University of Edinburgh

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance

Yi Cheng

Hong Kong Polytechnic University

Andrew P. Marshall

University of Strathclyde - Strathclyde Business School

Date Written: 2019

Abstract

This paper applies a real option framework to suggest that the takeover premia in mergers and acquisitions can be influenced by (a) the pre-bid ownership of target and (b) the real option characteristics of both acquirer and target firms. Our findings show that pre-bid ownership reduces the takeover premia, which is consistent with the argument that pre-bid ownership reduces in- formation asymmetry. However, we find that the takeover premia is higher when both the acquirer and target firms exhibit real option capacity as measured by positive risk-return sensitivity. As a result, an acquirer with real option capacity is willing to pay higher takeover premia for an option embedded in the target firm.

Keywords: Real options, Takeover premia, Acquirer abnormal returns, Target abnormal returns

JEL Classification: G12, G14, G30, G34

Suggested Citation

Barbopoulos, Leonidas G. and Cheng, Louis T. W. and Cheng, Casey (Yi) and Marshall, Andrew P., The Role of Real Options in the Takeover Premia in Mergers and Acquisitions (2019). International Review of Economics & Finance, Vol. 61, 2019, Available at SSRN: https://ssrn.com/abstract=3796878

Leonidas G. Barbopoulos (Contact Author)

University of Edinburgh ( email )

University of Edinburgh Business School
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance ( email )

Hang Shin Link
Siu Lek Yuen
Shatin
United States

Casey (Yi) Cheng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Andrew P. Marshall

University of Strathclyde - Strathclyde Business School ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 548 3894 (Phone)

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