Private Acquisition Gains : A Contingent Claims Explanation

This paper studies acquisition announcement returns and offers a new explanation from the contingent claims perspective for the difference in abnormal returns between acquirers of private and public targets. In this context an acquisition is analogous to buying a call option, which would result increasing the value of the acquirer, and, hence, the value of the acquiring firm is expected to increase with uncertainty. We find that acquirers of private firms earn higher announcement returns than acquirers of public targets and that the private acquisition gains are associated with increases in growth options (uncertainty). Consistent with the contingent claims hypothesis predicting higher announcement returns for near-all equity (low-leveraged) acquirers than their levered counterparts, we also find that these gains are inversely related to leverage