Paul A. Borochin is an Assistant Professor at the University of Connecticut Business School in Storrs, CT.
When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs
Article first published online: 21 APR 2014
© 2014 Financial Management Association International.
Volume 43, Issue 2, pages 445–466, Summer 2014
How to Cite
Borochin, P. A. (2014), When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs. Financial Management, 43: 445–466. doi: 10.1111/fima.12026
I am very grateful to David Robinson, Alon Brav, Ron Gallant, Paige Ouimet, Joe Golec, Carmelo Giaccotto, Assaf Eisdorfer, an anonymous referee, Raghavendra Rau (Editor), and seminar participants at Duke University, the University of Connecticut, and the 2012 FMA Annual Meeting for helpful comments.
- Issue published online: 4 JUN 2014
- Article first published online: 21 APR 2014
- Accepted manuscript online: 7 MAY 2013 05:20AM EST
I introduce and test a method to identify market expectations about value creation in mergers. Post-announcement market prices reflect beliefs about both merged and standalone firm values, and the likelihood of either outcome. Stock prices alone do not contain sufficient information to identify these latent beliefs. By adding exchange-traded stock option data, I deliver a clear decomposition of observed value change into two parts: 1) value creation and 2) new information about standalone value. Previous research has struggled to disentangle the two. This decomposition provides a strong and practical measure of the market's expectations about value creation in a merger.