Buyout Price Research Articles

Racial Gaps in Federal Flood Buyout Compensations

In a managed retreat, or “buyout,” program, homeowners are offered their property's fair-market value to relocate from a flood-prone area. Using a nationwide sample of federal buyout acquisitions and the universe of US housing transactions over the last two decades, we estimate whether the discount in buyout price compensation, calculated using a hedonic prediction model, depends on a homeowner's race. We provide the first systematic evidence of inequitable compensation in a federal buyout program using nationwide administrative data. Disproportionate compensation, in an attempt to adapt to a warming climate, may further widen the wealth and social mobility gaps.

The impact of simultaneous shocks to financial markets and mortality on pension buy-out prices

AbstractIn this paper, we determine the fair value of a pension buyout contract under the assumption that changes in mortality can have an impact on financial markets. Our proposed model allows for shocks to occur simultaneously in mortality rates and financial markets, so that strong changes in mortality rates can affect interest rates and asset prices. This approach challenges the common but very strong assumption that mortality and market risk drivers are independent. A simulation-based pricing framework is applied to determine the buyout premium for a hypothetical fully funded pension scheme. The results of an extensive sensitivity analysis show how buyout prices are affected by changes in mortality and financial markets. Surprisingly, we find that the impact of shocks is similar whether or not these shocks occur simultaneously or not, although there are some differences in annuity prices and buyout premiums. We clearly see that the intensity and severity of shocks, and asset price volatility play a dominant role for buyout prices.

Buyout Price Optimization in the Rent-to-Own Business

Buyout Price Optimization in the Rent-to-Own Business

Management buyouts in times of economic policy uncertainty

Using a sample of 18,225 global buyouts, we find that management buyouts (MBOs) are significantly more likely to occur if economic policy uncertainty (EPU) increases. This finding is consistent with the idea that EPU provides an opportunity for insiders to capitalize on private information and time the market. Further results suggest that market timing pays off on average. We find that MBOs achieve more favorable buyout prices and greater post-buyout operating improvements than institutional buyouts during times of high EPU. Our results hold when exploiting close national election races as a quasi-natural experiment for EPU.

A buyout option alleviates implicit collusion in uniform‐price auctions

Demand reduction causes extremely low revenues in uniform‐price auctions, which can be interpreted as implicit collusion among bidders. We model a uniform‐price auction with a buyout option and investigate its potential for alleviating implicit collusion. We focus on the extreme case that yields a revenue of zero with no buyout option. Our main result is that the seller obtains a positive expected revenue unless the buyout price is high. Notably, a bidder will exercise a buyout option even though the bidder is risk neutral; that is, auction aversion is fully endogenous, in contradiction to the findings of previous work.

Turning the Tables in Research and Development Licensing Contracts

Research and development (R&D) collaborations between an innovator and her partner are often undertaken when neither party can bring the product to market individually, which precludes value creation without a joint effort. Yet, the uncertain nature of R&D complicates the monitoring of effort, and the resulting moral hazard reduces a collaboration’s value. Either party can avoid this outcome by acquiring the capability that is missing and then taking sole ownership of the project. That approach involves two types of risks: one related to whether the other party’s capability will be acquired and one related to how well it will be implemented (if acquired). We find that the extent of these two risks determines the optimality of delaying contracting or of signing contracts with buyout and buyback options, a baseball arbitration clause, or a novel reciprocal option. Baseball arbitration and reciprocal option clauses are unique in two ways. First, unlike typical options with predetermined strike prices, they allow either party to determine the buyout price at the time of their offer. Second, they allow the offer’s recipient to “turn the tables” on the other party. Although baseball arbitration and reciprocal option contracts both address inefficient joint development and product allocation, they exhibit their own inefficiencies that stem from the two parties’ strategic behavior. The best choice of contract is determined by trade-offs between these inefficiencies. Our model explores the similarities between the baseball arbitration and reciprocal option clauses, and we propose a modification to the reciprocal option contract that would increase its profitability. This paper was accepted by Terry Taylor, operations management.

The patent buyout price for human papilloma virus (HPV) vaccine and the ratio of R&D costs to the patent value.

Human papillomavirus (HPV) is responsible for almost all of the 570,000 new cases of cervical cancer and approximately 311,000 deaths per year. HPV vaccination is an integral component of the World Health Organization’s (WHO) global strategy to fight the disease. However, high vaccine prices enforced through patent protection are limiting vaccine expansion, particularly in low- and middle-income countries. By limiting market power, patent buyouts could reduce vaccine prices and raise HPV vaccination rates while keeping innovation incentives. We estimate the global patent buyout price as the present discounted value (PDV) of the future profit stream over the remaining patent length for Merck’s HPV vaccines (Gardasil-4 and 9), which hold 87% of the global HPV vaccine market, in the range of US$ 15.6–27.7 billion (in 2018 US$). The estimated PDV of the profit stream since market introduction amounts to US$ 17.8–42.8 billion and the estimated R&D cost to US$ 1.05–1.21 billion. Thus, we arrive at a ratio of R&D costs to the patent value of the order of 2.5–6.8%. We relate this figure to typical estimates of the probability of success (POS) for clinical trials of vaccines to discuss if patent protection provides Merck with extraordinarily strong price setting power.

Cross-border buyout pricing

Using a dataset of 1149 global private equity transactions, we find that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones. We attribute this finding to informational disadvantages of foreign acquirers. Consistent with this idea, we find that the spread in valuation multiples narrows when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size. Further results suggest that local partnering in a syndicate serves as an effective remedy to avoid adverse pricing effects. The spread in valuation multiples is also less pronounced for large buyout funds, presumably because they draw on sufficient organizational resources to cope with cross-border-related transaction costs.

Turning the Tables in R&D Licensing Contracts

Research and development (R&D) collaborations between an innovator and her partner are often undertaken when neither party can bring the product to market individually, which precludes value creation without a joint effort. Yet R&D's uncertain nature complicates the monitoring of effort, and the resulting moral hazard reduces a collaboration's value. Either party can avoid this outcome by acquiring the capability that is missing and then taking sole ownership of the project. That approach involves two types of risks: one related to whether the other party's capability will be acquired, and one to how well it will be implemented (if acquired). We find that the extent of these two risks determines the optimality of delaying contracting or of signing contracts with buyout and buyback options, a baseball arbitration clause, or a novel reciprocal option. Baseball arbitration and reciprocal option clauses are unique in two ways. First, unlike typical options with pre-determined strike prices, they allow either party to determine the buyout price at the time of their offer. Second, they allow the offer's recipient to turn the tables on the other party. Although baseball arbitration and reciprocal option contracts both address inefficient joint development and product allocation, they exhibit their own inefficiencies that stem from the two parties' strategic behavior. The best choice of contract is determined by trade-offs between these inefficiencies. Our model explores the similarities between the baseball arbitration and reciprocal option clauses, and we propose a modification to the reciprocal option contract that would increase its profitability.

The Patent Buyout Price for Human Papilloma Virus (HPV) Vaccine and the Ratio of R&D Costs to the Patent Value

The Patent Buyout Price for Human Papilloma Virus (HPV) Vaccine and the Ratio of R&D Costs to the Patent Value

Cross-Border Buyout Pricing

Using a dataset of 1,149 global private equity transactions, we find that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones. We attribute this finding to informational disadvantages of foreign acquirers. Consistent with this idea, we find that the spread in valuation multiples becomes smaller when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size. Further results suggest that local partnering in a syndicate serves as an effective remedy to avoid adverse pricing effects. The spread in valuation multiples is also less pronounced for large buyout funds, presumably because they draw on sufficient organizational resources to cope with cross-border-related transaction costs.

Revenue in first-price auctions with a buy-out price and risk-averse bidders

Abstract We model the “Buy-It-Now or Best Offer” eBay listing option as a first-price auction with a buy-out price and consider seller revenue when bidders are risk-averse. In this model we consider a discrete setting and a continuous setting. We show that a buy-out price in a first-price auction can increase seller revenue in the discrete setting but not in the continuous setting. Furthermore, we prove that in either setting a second-price auction with an optimally chosen buy-out price will never generate more expected revenue than a first-price auction with an optimally chosen buy-out price. These theoretical results support the thesis that a first-price mechanism is superior in expected revenue generation to a second-price mechanism in an online marketplaces where sellers are risk-neutral and buyers are risk-averse and explain the prevalence of “Buy-It-Now or Best Offer” listings on eBay over the traditional eBay auction.

Protecting the weak: Efficacy of mandated auctions in minority buyouts

There is considerable debate among economists and legal scholars about the need for regulatory protection for minority shareholders when controlling shareholders seek to buy them out. We examine the impact of regulatory changes in India which mandated a reverse book building (RBB) process, wherein the buyout price was determined by minority shareholders rather than by the controlling shareholders. Accounting for differences in firm and deal characteristics, we find that the RBB process increased the gains to minority shareholders. Stock price reactions at deal announcement reflect these gains after a learning period during which market participants adjusted to this new mechanism.

Strategies for Making Best Offers on eBay

We model for “Buy-It-Now or Best Offer” auctions on eBay using two different models. In the first model, risk-neutral bidders submit bids in serial and try to surpass a stochastic seller threshold while taking into account how many previous failed bids were made by other bidders. We compute optimal strategies for this model and show that bidder expected surplus decreases in the number of previous failed bids. In the second model we assume bidders do not know how many previous failed bids have been made, and instead use a first-price sealed-bid mechanism with a buy-out price where bidders serially submit bids with the knowledge that no previous bidders have used the buy-out price. We derive a unique equilibrium bidding strategy for risk-neutral bidders in this serial model, show that any equilibrium in a similar parallel bidding model is the same as the equilibrium in the serial model, and compute seller revenue. In particular, under certain circumstances, bidders will bid more in this format than they would in a standard first-price sealed-bid auction, but that a seller maximizes expected revenue by setting a buy-out price higher than any bidder is willing to pay thereby making the auction essentially a first-price auction. KEYWORDS: Auction Theory; eBay; Buy-It-Now or Best Offer; Symmetric Bayesian Nash Equilibrium; Buy-Out Price; First-Price Sealed-Bid

Pricing pension buy-outs under stochastic interest and mortality rates

Pension buy-out is a special financial asset issued to offload the pension liabilities holistically in exchange for an upfront premium. In this paper, we concentrate on the pricing of pension buy-outs under dependence between interest and mortality rates risks with an explicit correlation structure in a continuous time framework. Change of measure technique is invoked to simplify the valuation. We also present how to obtain the buy-out price for a hypothetical benefit pension scheme using stochastic models to govern the dynamics of interest and mortality rates. Besides employing a non-mean reverting specification of the Ornstein–Uhlenbeck process and a continuous version of Lee–Carter setting for modeling mortality rates, we prefer Vasicek and Cox–Ingersoll–Ross models for short rates. We provide numerical results under various scenarios along with the confidence intervals using Monte Carlo simulations.

W poszukiwaniu uzasadnienia ekonomicznego dla (standardu wartości) Buy-out price

W poszukiwaniu uzasadnienia ekonomicznego dla (standardu wartości) Buy-out price

Management Buy-out Pricing Model: A Fairness Preference Perspective

In order to determine the effective and reasonable management buyout price, considered of asymmetric infor- mation, this paper investigated the shareholders' decision-making behavior during the management buyout pricing proc- ess under a fairness preferences perspective. The conclusions in this paper were�1) The greater the value of the option, the smaller the critical probability of management buy-out success, namely smaller posteriori probability of the original shareholders to the management; and 2) MBO share is affected by inequity aversion. In order to enhance utility, manage- ment with higher degree of inequity aversion would increase the probability of cheating and moral hazard. The contribu- tions of this paper were: the signal display principle of option value has been found; and studied the fairness preference during the process, psychological disutility produced by fairness preference has a crowding-out effect on managerial own- ership's incentive contracts.

Estimating the Price of ROCs

Under the U.K. government's Renewable Obligation system of tradable quotas, each unit of generation from renewables creates a renewable obligation certificate (ROC). Electricity generators can earn ROCs through their own production, purchase ROCs in the market, or pay the buyout price to comply with the quota set by the RO. A unique aspect of this regulation is that all entities holding ROCs receive a share of the buyout fund – the sum of all compliance purchases using the buyout price. This setup ensures that the difference between the market price for ROCs and the buyout price should equal the expected share of the buyout fund, as regulated entities arbitrage these two compliance options. An analysis finds that minimum temperature in the U.K. is correlated with the buyout price differential, while the price of natural gas is not.

Manager Divestment in Leveraged Buyouts

We examine changes in managers' investment in the firm around leveraged buyouts and find agency costs counter to those described in extant literature. In majority of deals during 1997–2008, managers divested a portion of their pre‐LBO shareholdings while maintaining an ownership stake in the post‐LBO firm. Such divestment opportunities encourage managers to behave in a way that benefits existing shareholders but is costly to new investors. We report a positive relation between management's divestment and pre‐LBO earnings management, market timing, and better buyout pricing. Although managerial divestment also leads to subpar post‐buyout performance, the involvement of private equity mitigates it.

Manager Divestment in Leveraged Buyouts

We examine changes in managers' investment in the firm around leveraged buyouts and find agency costs counter to those described in extant literature. In majority of deals during 1997–2008, managers divested a portion of their pre-LBO shareholdings while maintaining an ownership stake in the post-LBO firm. Such divestment opportunities encourage managers to behave in a way that benefits existing shareholders but is costly to new investors. We report a positive relation between management's divestment and pre-LBO earnings management, market timing, and better buyout pricing. Although managerial divestment also leads to subpar post-buyout performance, the involvement of private equity mitigates it.