Real options signaling game models for dynamic acquisition under information asymmetry

Abstract

We construct a real options signaling game model to analyze the impact of asymmetric information on the dynamic acquisition decision made by the aggressive acquirer firm and passive target firm in the takeover terms and timing. The target firm is assumed to have partial information on the synergy factor of the acquirer firm in generating the surplus value. Our dynamic acquisition game models are based on the market valuation of the surplus value of the acquirer and target firms, where the restructuring opportunities are modeled as exchange options. We analyze the various forms of equilibrium strategies on the deal and timing of takeover in the acquisition game and provide the mathematical characterization of the pooling and separating strategies adopted by the acquirer firm. We also determine the terms of takeover in the signaling game under varying levels of information asymmetry and synergy.