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Takeovers and Equity Derivatives

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  • Martin G. Arzac

Abstract

This paper examines the use of equity derivatives in takeovers. The equilibrium model developed here shows that allowing the bidder to purchase equity derivatives on the target prior to the announcement of a takeover bid unequivocally increases the bid's probability, of success. The resulting propositions have major implications for takeover regulation, economic efficiency, and general social welfare, as the benefits of regulating the use of equity derivatives in acquisitions may not exceed the costs.

Suggested Citation

  • Martin G. Arzac, 1998. "Takeovers and Equity Derivatives," The American Economist, Sage Publications, vol. 42(1), pages 101-107, March.
    • Handle: RePEc:sae:amerec:v:42:y:1998:i:1:p:101-107
    DOI: 10.1177/056943459804200112
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    References listed on IDEAS

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    1. Hirshleifer, David & Titman, Sheridan, 1990. "Share Tendering Strategies and the Success of Hostile Takeover Bids," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 295-324, April.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    3. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    4. Jarrell, Gregg A & Brickley, James A & Netter, Jeffry M, 1988. "The Market for Corporate Control: The Empirical Evidence Since 1980," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 49-68, Winter.
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