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A Theory of Takeovers and Disinvestment

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  • Bart Lambrecht
  • Stewart C. Myers
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    Abstract

    We present a real-options model of takeovers and disinvestment in declining industries. As product demand declines, a first-best closure level is reached, where overall value is maximized by shutting down the .rm and releasing its capital to investors. Absent takeovers, managers of unlevered firms always abandon the firm's business too late. We model the managers' payout policy absent takeovers and consider the effects of golden parachutes and leverage on managers' shut-down decisions. We analyze the effects of takeovers of under-leveraged firms. Takeovers by raiders enforce first-best closure. Hostile takeovers by other firms occur either at the first-best closure point or too early. We also consider management buyouts and mergers of equals and show that in both cases closure happens inefficiently late.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11082.

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    Date of creation: Jan 2005
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    Publication status: published as Lambrecht, Bart M. and Steward C. Myers. "A Theory of Takeovers and Disinvestment." Journal of Finance 62, 2 (April 2007): 809-45.
    Handle: RePEc:nbr:nberwo:11082

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