HEC Research Papers Series,
HEC Paris

Abstract: In an empirical study of cash mergers since 1996, we find that the equity options on target firms display a pronounced smile pattern in their implied volatilities which gets more pronounced when the merger success probability gets higher. We propose an arbitrage-free model to analyze option prices for firms undergoing a cash merger attempt. Our formula matches well the observed merger volatility smile. Furthermore, as predicted by the model, we show empirically that the merger volatility smile has a kink at the offer price, and that the magnitude of the kink is proportional to the merger success probability.

Keywords: Mergers and acquisitions; Black-Scholes formula; success probability; fallback price; Markov Chain Monte Carlo

JEL-codes: G13; G34

51 pages, First version: November 21, 2017. Revised: July 12, 2018. Earlier revisions: November 21, 2017.

Full text files

papers.cfm?abstract_id=1364491  Full text

Download statistics

• HEC Paris
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Antoine Haldemann ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:ebg:heccah:1213This page generated on 2024-09-13 22:19:53.