Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2004-06-16
Revision-Date: 2005-02-23
Number: 04-084/2
Author-Name: Han T.J. Smit
Author-Email: jsmit@few.eur.nl
Author-Workplace-Name: Faculty of Economics, Erasmus Universiteit Rotterdam
Author-Name: Ward A. van den Berg
Author-Email: wavandenberg@few.eur.nl
Author-Workplace-Name: Faculty of Economics, Erasmus Universiteit Rotterdam
Author-Name: Wouter De Maeseneire
Author-Workplace-Name: Ghent University, and Erasmus Universiteit Rotterdam
Title: Acquisitions as a Real Options Bidding Game
Abstract: This paper uses a unified treatment of real options and game theory to examine value appropriation in takeovers within a competitive environment of imperfect information. The integrated model considers a potential target as a shared real option on a bundle of resources. Competing potential buyers may sequentially perform due diligence and incur costs (option premium) to become informed about their firm-specific target value (underlying value) before making a bid (exercise price). The first player’s bid provides a signal on its own and rivals’ target value, thereby affecting potential bidders’ option value. The level of information costs and the option value, affected by heterogeneity between bidders (correlation), their expected target value, and uncertainty, determine value appropriation in acquisitions.
Classification-JEL: D81; D82; G30; G34
Keywords: Acquisitions; Competitive bidding; Real options; Resources; Option game
File-Url: https://papers.tinbergen.nl/04084.pdf
File-Format: application/pdf
File-Size: 585088 bytes
Handle: RePEc:tin:wpaper:20040084