The role of real options in the takeover premia in mergers and acquisitions

Barbopoulos, Leonidas G. and Cheng, Louis T.W. and Cheng, Yi and Marshall, Andrew (2019) The role of real options in the takeover premia in mergers and acquisitions. International Review of Economics and Finance, 61. pp. 91-107. ISSN 1059-0560 (https://doi.org/10.1016/j.iref.2019.01.006)

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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 information 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.

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