A Theory of Takeovers and Disinvestment

50 Pages Posted: 9 Jan 2005

See all articles by Bart M. Lambrecht

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 3, 2005

Abstract

We present a real-options model of takeovers and disinvestment in declining industries. As product demand declines, a first-best closure level is reached, where overall value is maximized by shutting down the firm and releasing its capital to investors. Absent takeovers, managers of unlevered firms always abandon the firm's business too late, but debt and golden parachutes can mitigate this inefficiency. We analyze the effects of takeovers of under-leveraged firms. Takeovers by raiders enforce first-best closure. Hostile takeovers by other firms occur either at the first-best closure point or too early. We also consider management buyouts and mergers of equals and show that in both cases closure happens inefficiently late.

Keywords: Disinvestment, takeover, real option, managerial incentives

JEL Classification: G34, C72, G13

Suggested Citation

Lambrecht, Bart and Myers, Stewart C., A Theory of Takeovers and Disinvestment (January 3, 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=644863 or http://dx.doi.org/10.2139/ssrn.644863

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

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National Bureau of Economic Research (NBER)

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