| Here I present two related essays that explore the interaction between financing decisions, competitive environment and takeover transactions in a real options framework.; The first part develops an equilibrium framework for the joint determination of the timing and the terms of takeovers in the presence of competition and imperfect information. In the model, outside investors have incomplete information and can update their beliefs by observing the behavior of participating firms. In equilibrium part of the uncertainty remains unresolved until the takeover announcement, thereby inducing abnormal announcement returns. The returns resulting from the equilibrium strategies derived in the paper are consistent with the available empirical evidence. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns. This part is a joint work with Erwan Morellec.; In the second part I propose a model for two bidding firms competing to acquire a target. I show how the capital structures of the bidders determine the equilibrium outcome of the takeover contest. Notably, I demonstrate that there exists an asymmetric equilibrium with endogenous leverage, bankruptcy, and takeover terms. The model generates a number of predictions consistent with empirical evidence and provides grounds for further empirical research. In particular, the model predicts that the leverage of the winning bidder is below the industry average. Also, the winner of the takeover contest is expected to lever up after the takeover consummation. The model also shows the potential to reconcile traditional contingent claims capital structure models with empirical evidence. Finally, the model relates the degree of leverage asymmetry to industry characteristics.; Empirical analysis generally supports the predictions of the model. |
