Abstract
Considerable effort has been devoted to indicate the critical determinants of acquisition premiums. However, the determinants of mergers and acquisitions (M&A) premiums are not yet fully understood. This research paper empirically examines the effect of stock return volatility on mergers and acquisitions premiums through real options value of bidder and target firms. With a sample of 2,559 completed M&A deals in the US during 1986-2016, we find that bidder firms tend to pay more premiums for the targets that have more future real option value and higher risk. To be more specific, when targets have more real options measured as high Research and Development (R&D) to market value, high sales growth rate, and low leverage ratio, the relationship between target return volatility and acquisition premiums is stronger. This study contributes not only to the literature regarding the determinants of mergers and acquisitions premiums but also to the literature of real options value. Keywords: Mergers and acquisition premiums, acquisition premiums, stock return volatility, real options, growth options
Highlights
Mergers and acquisitions (M&A) have received considerable attention in the literature
For a sample of 2,559 M&A deals in the U.S from 1986 to 2016, we find that when targets have more real options measured as high Research and Development (R&D) to market value, high sales growth rate, and low leverage ratio, the relationship between target return volatility and acquisition premiums is stronger
After investigating the influence of stock return volatility on M&A premiums by using real options approach, we find that the positive relationship between acquisition premiums and target stock return volatility is stronger for target firms that have more future growth options
Summary
Mergers and acquisitions (M&A) have received considerable attention in the literature. Takeover bid premium is a significant factor to explain the returns obtained by the stockholders. Several previous research papers claim that high takeover premiums are value destroying for bidder shareholders. Other research papers argue that large acquisition premiums lead to the high stock return. Some research papers provide the results that M&A premium and stock return are positively correlated (Antoniou, Arbour, & Zhao, 2008; Bradley, Desai, & Kim, 1983; Díaz, Azofra, & Gutiérrez, 2009; Greenfield, 1992). Varaiya and Ferris (1987), Sirower (1997), and Schwert (2003) find that the M&A premiums are negatively correlated with abnormal stock return
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