Acquisitions as a Real Options Bidding Game

Tinbergen Institute Discussion Paper No. 04-084/2

38 Pages Posted: 22 Jul 2004

See all articles by Han Smit

Han Smit

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Wouter De Maeseneire

Vlerick Business School; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Ward A. van den Berg

Erasmus University Rotterdam, Faculty of Economics

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

Smit, Han and De Maeseneire, Wouter and van den Berg, Ward A., Acquisitions as a Real Options Bidding Game (November 2006). Tinbergen Institute Discussion Paper No. 04-084/2, Available at SSRN: https://ssrn.com/abstract=565981 or http://dx.doi.org/10.2139/ssrn.565981

Han Smit

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Wouter De Maeseneire

Vlerick Business School ( email )

Reep 1
Ghent
BE-9000 Ghent
Belgium

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Ward A. Van den Berg (Contact Author)

Erasmus University Rotterdam, Faculty of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
729
Abstract Views
3,612
Rank
64,796
PlumX Metrics