Abstract
Using a game-theoretic real option approach, this paper presents a model of corporate acquisitions. We incorporate imperfect information about synergy gains, strategic interaction among competing bidders, and between the successful bidder and the target firm. Assuming the absence of managerial motives, the model is able to explain some empirical regularities that have only been explained under the agency and hubris hypotheses. Undervaluation, asymmetric distribution of gains, and divestitures are a natural output in our model. This theoretical model suggests that controlling for industry characteristics is an important element in empirical research.
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