A Research On Decision And Risk Premium Of Merger Based On Real Options

Past studies about whether merger and acquisition(M&A)brings value to both of the firms that participate got different results.While empirical studies have found many facts that will give an influence to the return of merger,there exit a lack of theoretical studies to explain why and how the difference happens.While past theoretical studies about merger take asset-in-place as firms' value,this paper bases on the real option model and views from growth option or contracting option besides asset-in-place to give an explain to why the return to the acquirer and the target are different.Taking market size as decision variable,based on the real option model and dynamic optimization,the research and conclusion of this paper includes:1.When there exist real options before merger and the options transfer to the new entity after merger,whether holding an option can help a firm to get more share in the new entity depends on the character of the option: holding a contracting option can give a firm more share in the new entity,while whether holding a growth can do this depends on the ability that the holder can excise the option along.2.Firms holding a contacting option before get more risk premium before merger in stock market than the ones hold none option,while firms holding a growth option get less.3.If merger doesn't change the value of contracting option,then holding a contracting option won't change the timing of merger;and if excising a growth option together by merger activity will take more values to firms,holding a growth option will make the timing of merger earlier.4.When merger activity takes following options to firms,both expansion option and contracting option included are in positive value.And the expansion options raise the risk of merger,while the contracting options reduce it.