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An options-based approach to forecast competing bids: evidence for Canadian takeover battles

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During takeover battles, a tender offer provides a call option right to the target’s shareholders: it guarantees the offered price but maintains the chance of a higher offer. We present an options-based approach to estimate the probability and expected value of higher competing takeover bids using target stock price data. Analysing Canadian takeover battles in the period 1997 to 2007 we find that during the 5 trading days prior to the occurrence of an increased takeover bid, the estimated probability of a higher bid exceeds 80% on average and the expected value of a potential competing bid almost matches the realized value.

Keywords: G12; G13; G34; competing takeover bids; forecasting; options pricing; takeover bids

Document Type: Research Article


Affiliations: 1: TU Dresden, Faculty of Economics and Business, Dresden, Germany 2: University of Erfurt, Nordhaeuser Strasse 63, Erfurt, 99089, Germany

Publication date: December 1, 2013

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