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Option Games, Asymmetric Information And Merger Announcement Returns

In: Advances In Doctoral Research In Management

Author

Listed:
  • Hongbo Pan

    (School of Management, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan, Hubei Province, P.R. China, 430074, P.R. China)

  • Xinping Xia

    (School of Management, Huazhong University of Science and Technology, 1037 Luoyu Road, Wuhan, Hubei Province, P.R. China, 430074, P.R. China)

Abstract

This paper presents a dynamic model of mergers based on stock market valuations of merging firms with industry-wide uncertainty. The model incorporates asymmetric information and determines the terms and timing of mergers by solving cooperative option games between acquiring shareholders and target shareholders. The model predicts that (1) returns to acquiring shareholders can be negative if the managers of participants are much more optimistic over merging synergism than outside investors; (2) returns to acquiring shareholders are negatively correlated with the size of the acquirer; (3) returns to target shareholders are negatively correlated with the size of the target.

Suggested Citation

  • Hongbo Pan & Xinping Xia, 2006. "Option Games, Asymmetric Information And Merger Announcement Returns," World Scientific Book Chapters, in: Luiz Moutinho & Graeme Hutcheson & Paulo Rita (ed.), Advances In Doctoral Research In Management, chapter 10, pages 211-219, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812707246_0010
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