A Theory of Takeovers and Disinvestment

45 Pages Posted: 23 Feb 2005 Last revised: 13 Aug 2009

See all articles by Stewart C. Myers

Stewart C. Myers

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

Bart M. Lambrecht

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 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 .rm and releasing its capital to investors. Absent takeovers, managers of unlevered firms always abandon the firm's business too late. We model the managers' payout policy absent takeovers and consider the effects of golden parachutes and leverage on managers' shut-down decisions. 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.

Suggested Citation

Myers, Stewart C. and Lambrecht, Bart, A Theory of Takeovers and Disinvestment (January 2005). NBER Working Paper No. w11082. Available at SSRN: https://ssrn.com/abstract=653026

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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National Bureau of Economic Research (NBER)

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Bart Lambrecht

University of Cambridge - Judge Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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