Stock Returns in Mergers and Acquisitions
This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the period surrounding control transactions. Using a sample of 1,086 takeovers of publicly traded U.S. firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions. Copyright (c) 2008 by The American Finance Association.
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Volume (Year): 63 (2008)
Issue (Month): 3 (06)
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