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When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs
Author(s) -
Borochin Paul A.
Publication year - 2014
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12026
Subject(s) - value (mathematics) , stock market , stock exchange , economics , market value , financial economics , business , stock (firearms) , econometrics , microeconomics , finance , statistics , mathematics , mechanical engineering , horse , engineering , biology , paleontology
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.