Abstract/Summary

This article models mergers as exchange options where acquirers offer stocks and/or cash to target firms in exchange of acquiring some shareholding in target firms. Mergers analysed in this article happen between homogeneous entities. The Black and Scholes (B–S) and Margrabe models are used to price cash and stocks (including stocks and cash) deals respectively. The merger and acquisition (M&A) traits are grouped as conflict of interest, market growth, funding and specialization. Regression results illustrate that exchange options react to M&A characteristics differently. Thus, the results are beneficial to both sell-and buy-side investors in terms of how one manages merging firms. The goodness of fit suggests that strategic acquisitions played important roles.