Acquisitions as a Real Options Bidding Game
AbstractThis 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.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-084/2.
Date of creation: 16 Jun 2004
Date of revision: 23 Feb 2005
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Web page: http://www.tinbergen.nl
Acquisitions; Competitive bidding; Real options; Resources; Option game;
Other versions of this item:
- H. T.J. Smit & W. A. Van Den Berg & W. De Maeseneire, 2005. "Acquisitions as a real options bidding game," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/289, Ghent University, Faculty of Economics and Business Administration.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-08-23 (Accounting & Auditing)
- NEP-ALL-2004-08-23 (All new papers)
- NEP-COM-2004-08-23 (Industrial Competition)
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