Acquisitions as a Real Options Bidding Game
Tinbergen Institute Discussion Paper No. 04-084/2
38 Pages Posted: 22 Jul 2004
Date Written: November 2006
Abstract
This paper uses a unified treatment of real options and game theory to examine the occurrence of bidding contests within a competitive environment of imperfect information and asymmetric bidders. Competing potential buyers may sequentially perform due diligence and incur costs (option premium) to become informed about their firm-specific target value (underlying value) before making a bid (exercise price). The first player's bid reveals a signal on its own and the rival's target value, thereby affecting the value of the rival's option to bid on the target and the probability of a bidding contest. We find that bidding contests are more likely to take place between moderately correlated buyers, whereas rather diverse or just very similar buyers are less likely to compete.
Keywords: Acquisitions, Competitive bidding, Real options, Resources, Option game
JEL Classification: D81, D82, G30, G34
Suggested Citation: Suggested Citation
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