International Journal of Real Options and Strategy
Online ISSN : 2186-4667
ISSN-L : 2186-4667
Volume 2
Displaying 1-2 of 2 articles from this issue
Theoretical Paper
  • Jing-Hui Dong, Yoshio Iihara
    2014 Volume 2 Pages 1-12
    Published: 2014
    Released on J-STAGE: December 10, 2014
    In this paper, we propose a real options model for determining the optimal timing of a merger and acquisition (M&A). The estimated increased firm value of the acquirer after a merger may need to be reassessed when the economic situations or the two firms’ individual circumstances change dramatically during the period for preparing an M&A. Focusing on this point, we model the changes in increased firm value by using a discrete stochastic process. As the cost of an M&A is related to the market price of the target, we assume that the cost varies to follow a geometric Brownian motion. We derive explicit formulas for the optimal timing and expected waiting time to announce an M&A under the 2-dimensional stochastic process. Furthermore, we analyze the effects on the optimal timing and the expected waiting time by changing parameters’ value.
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