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Volatility of implied volatility and mergers and acquisitions

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  • Betton, Sandra
  • El Meslmani, Nabil
  • Switzer, Lorne N.

Abstract

In this paper, we examine how uncertainty about risk, based on firm estimates of volatility of implied volatility (VIV) affects mergers and acquisitions. We show that uncertainty about risk, captured by firm estimates of volatility of implied volatility (VIV) affects both bidder and target announcement returns and the method of payment. For high-risk firms, bidder firm VIV negatively effects the likelihood of a cash-only offer. For low-risk firms, bidder firms (target firms) VIV negatively (positively) affects bidder firm's announcement returns. Target announcement returns for low-risk firms are negatively related to bidder firm VIV. When we control for the volatility level using firm estimates of average implied volatility, VIV effects on announcement returns are sustained. However, average volatility effects subsume bidder firm VIV effects on the method of payment. Furthermore, high risk bidder firms revise their offer price upward with an increase in bidder VIV for non-cash offers.

Suggested Citation

  • Betton, Sandra & El Meslmani, Nabil & Switzer, Lorne N., 2022. "Volatility of implied volatility and mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:corfin:v:75:y:2022:i:c:s0929119922000864
    DOI: 10.1016/j.jcorpfin.2022.102243
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    More about this item

    Keywords

    Mergers and acquisitions; Informed trading; Volatility of implied volatility; Uncertainty about uncertainty; Uncertainty about risk;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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