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Acquisitions as a real options bidding game


  • H. T.J. SMIT



This paper uses a unified treatment of real options and game theory to examine the occurrence of bidding contests within a competitive environment of imperfect information and asymmetric bidders. 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 reveals a signal on its own and the rival’s target value, thereby affecting the value of the rival’s option to bid on the target and the probability of a bidding contest. We find that bidding contests are more likely to take place between moderately correlated buyers, whereas rather diverse or just very similar buyers are less likely to compete.

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  • 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.
  • Handle: RePEc:rug:rugwps:05/289

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    Cited by:

    1. Toxvaerd, Flavio, 2008. "Strategic merger waves: A theory of musical chairs," Journal of Economic Theory, Elsevier, vol. 140(1), pages 1-26, May.

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