Mergers and market valuation: real options approach

This paper investigates the connection between market valuation and a type of the merger (stock, cash) using real options setup. I solve explicitly for the timing and terms of cash mergers in two deferent settings to demonstrate that cash mergers generally occur at low market valuations, whereas stock mergers that may be observed at both low and high valuations; the result holds with some dierences for two dynamic setups. I also investigate the dynamics of the intra-industry mergers within the first setup. I solve for the optimal order of mergers inside an industry for dierent initial capital allocations to demonstrate that stock mergers in more concentrated industries occur at higher market valuation (i.e. later) as compared to mergers in less concentrated industries.