A Theory of Takeovers and Disinvestment

Authors

  • BART M. LAMBRECHT,

  • STEWART C. MYERS

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    • Lambrecht is at Lancaster University Management School and Myers is at the MIT Sloan School of Management. We thank Jianjun Miao, Erwan Morellec, Matthew Rhodes-Kropf, and Jeff Zwiebel. We also received helpful comments when presenting the paper at the annual meetings of the Western Finance Association (2004), European Finance Association (2005), the Center for Economic and Policy Research (2005), and at seminars at the Australian Graduate School of Management, Cass Business School, Gersensee, London Business School, the Melbourne Centre for Financial Studies, Yale University, and the universities of Antwerp, Cambridge, Cyprus, Lancaster, Lausanne, Leeds, London (Imperial College), Utrecht, Wisconsin-Madison, and Zurich.

ABSTRACT

We present a real-options model of takeovers and disinvestment in declining industries. As product demand declines, a first-best closure level is reached, where overall value is maximized by closing the firm and releasing its capital to investors. Absent takeovers, managers of underleveraged firms always close too late, although golden parachutes may accelerate closure. We analyze the effects of takeovers of under-leveraged firms. Takeovers by raiders enforce first-best closure. Hostile takeovers by other firms occur either at the first-best closure point or too early. Closure in management buyouts and mergers of equals happens inefficiently late.

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