Private acquisition gains: A contingent claims explanation |
| |
Authors: | John Doukas Auke Plantinga |
| |
Affiliation: | 1. Graduate School of Business, Old Dominion University, Norfolk, VA 23529-0222, USA;2. Faculty of Economics and Business, Department of Economics, Econometrics, and Finance, University of Groningen, Nettelbosje 2, Groningen, 9747AE, The Netherlands |
| |
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). |
| |
Keywords: | acquisitions target status announcement returns contingent claims analyst coverage |
|
|