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on Corporate Finance |
| By: | Dirk Hackbarth (Washington University, St. Louis - John M. Olin School of Business); Erwan Morellec (University of Lausanne - Institute of Banking and Finance (IBF)) |
| Abstract: | This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the time period surrounding control transactions. Using a sample of 1090 takeovers of publicly traded US firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions. |
| Keywords: | takeovers, real options, stock returns, firm-level betas |
| JEL: | G13 G14 G31 G34 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0601&r=cfn |
| By: | Erwan Morellec (University of Lausanne, Swiss Finance Institute and CEPR); Alexei Zhdanov (School of Management, George Mason University) |
| Abstract: | This paper analyzes the interaction between financial leverage and takeover activity. We develop a dynamic model of takeovers in which the financing strategies of bidding firms and the timing and terms of takeovers are jointly determined. In the paper, capital structure plays the role of a commitment device, and determines the outcome of the acquisition contest. We demonstrate that there exists an asymmetric equilibrium in financing policies with endogenous leverage, bankruptcy, and takeover terms, in which the bidder with the lowest leverage wins the takeover contest. Based on the resulting equilibrium, the model generates a number of new predictions. In particular, the model predicts that the leverage of the winning bidder is below the industry average and that acquirers should lever up after the takeover consummation. The model also relates the dispersion in leverage ratios to various industry characteristics, such as the volatility of cash flows, effective tax rates, and bankruptcy costs. |
| Keywords: | takeovers, option games, real options, capital structure |
| JEL: | G13 G32 G34 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0622&r=cfn |
| By: | Paolo Emilio Mistrulli (Bank of Italy - Research Department) |
| Abstract: | Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may be a channel allowing a bank default to spread to other banks. This paper analyzes how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Since information on bilateral exposures was not available in most previous studies, they assumed that banks spread their lending as evenly as possible among all the other banks by maximizing the entropy of interbank linkages. Based on the data available on actual bilateral exposures for all Italian banks, the results obtained by assuming the maximum entropy are compared with those reflecting the observed structure of interbank claims. The comparison indicates that, in line with the thesis prevailing in the literature, the maximum entropy method tends to underestimate the extent of contagion. However, this does not hold in general. Under certain circumstances, depending on the structure of the interbank linkages, the recovery rates of interbank exposures and banks’ capitalization, the maximum entropy approach overestimates the scope for contagion. |
| Keywords: | interbank market, financial contagion, systemic risk, maximum entropy |
| JEL: | G21 G28 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_641_07&r=cfn |