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When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs


  • 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.


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.