Private acquisition gains: A contingent claims explanation

John Doukas, Halit Gonenc*, Auke Plantinga

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Scopus)

Abstract

This paper studies announcement returns of Western European acquisitions of private and public targets. It uses a contingent claims perspective to offer a new explanation for the difference in abnormal returns between acquirers of private and public targets. In this context, an acquisition is analogous to buying a call option and the value of the acquirer increases with uncertainty about its growth prospects (options). We test this idea by studying the relation between announcement returns and acquirer's characteristics that proxy for the existence of growth options. Consistent with the contingent claims hypothesis, the private acquisition gains are associated with the combined effects of growth options (having higher runup before the acquisition announcement) with low level of leverage (near-all equity capital) and with uncertainty (measured by age and analyst coverage of acquirers).

Original languageEnglish
Pages (from-to)1090-1113
Number of pages24
JournalEuropean Journal of Finance
Volume20
Issue number12
Early online date11-Jan-2013
DOIs
Publication statusPublished - 2-Dec-2014

Keywords

  • announcement returns
  • target status
  • contingent claims
  • acquisitions
  • analyst coverage
  • STOCK RETURNS
  • INFORMATION ASYMMETRY
  • UNLISTED TARGETS
  • ACQUIRER RETURNS
  • GROWTH OPTIONS
  • CROSS-SECTION
  • INVESTMENT
  • DIVERSIFICATION
  • PERFORMANCE
  • OPINION

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