Abstract

The phenomenon of corporate acquisitions has been the subject of extensive research, but despite important advances in our understanding of these corporate events, many issues are still unclear. Our purpose in this thesis is to revisit the M&A subject using the real options paradigm. Even though this literature has been one of the most important recent developments in finance and economics, the application of its lessons to corporate acquisitions is still scarce. Using a game theoretic real option framework, we develop a model of corporate acquisitions. We incorporate imperfect information about synergy gains, strategic interaction among competing bidders, and between the acquirer and the target firm. Assuming the absence of managerial motives, the model is able to explain some empirical regularities that, thus far, have only been explained under the agency and hubris hypotheses. The undervaluation, asymmetric distribution of gains, and divestiture phenomena are natural results in our model. In a preliminary empirical test we find support for the prediction relating target gains to the target's undervaluation and volatility. Even though we do not intend to replace other competing theories of corporate acquisitions, we believe our model represents a valid alternative hypothesis that could help to improve our understanding of some stylized facts. The many still unexplored predictions from our model are an interesting area for future research.