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A Theory of Takeovers and Disinvestment

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  • Bart Lambrecht
  • Stewart C. Myers

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.

Suggested Citation

  • Bart Lambrecht & Stewart C. Myers, 2005. "A Theory of Takeovers and Disinvestment," NBER Working Papers 11082, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11082
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    References listed on IDEAS

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    Cited by:

    1. Boone, J., 2006. "Firms Merge in Response to Constraints," Discussion Paper 2006-60, Tilburg University, Center for Economic Research.

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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