TEL  Vol.4 No.3 , April 2014
A Theoretical Model of Directional Volume on Acquirer Stock in Cash Mergers
Abstract: The acquisition of a target firm in a transaction financed by cash is a cash merger. Announcements of cash mergers release the positive signal that the acquirer possesses cash reserves. As stock prices rise, informed traders may obtain abnormal returns by purchasing call options, selling put options or purchasing stock. This paper constructs a theoretical model in which call buy volume forms the upper bound of the final stock price, put sell volume forms the lower bound of the final stock price and stock purchase volume reveals the final stock price.
Cite this paper: Zikiye, M. , Abraham, R. and Harrington, C. (2014) A Theoretical Model of Directional Volume on Acquirer Stock in Cash Mergers. Theoretical Economics Letters, 4, 241-246. doi: 10.4236/tel.2014.43033.

[1]   Abraham, R., Harrington, C.W. and Williams, A.A. (2011) Multimarket Trading at Merger Announcement and Completion. Journal of Derivatives and Hedge Funds, 17, 186-197.

[2]   Easley, D.O., O’Hara, M. and Srinivas, P. (1998) Option Volume and Stock Prices: Evidence on Where Informed Traders Trade. Journal of Finance, 53, 431-465.

[3]   Glosten, L.R. and Milgrom, P.R. (1985) Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders. Journal of Finance, 14, 71-100.

[4]   Mitchell, M., Pulvino, T. and Stafford, E. (2004) Price Pressure around Mergers. Journal of Finance, 59, 31-63.

[5]   Elton, E.J. and Gruber, M.J. (1997). Modern Portfolio Theory, 1950 to Date. Journal of Banking and Finance, 21, 1743-1759.

[6]   Markowitz, H. (1952) The Utility of Wealth. Journal of Political Economy, 60, 151-158.

[7]   Sharpe, W.F. (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19, 425-442.

[8]   Lintner, J. (1965) The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics, 47, 13-37.

[9]   Merton, R.C. (1972) An Analytic Derivation of the Efficient Portfolio Frontier. Journal of Financial and Quantitative Analysis, 7, 1851-1872.

[10]   Puelz, A.V. (2000) A Stochastic Convergence Model for Portfolio Selection. Operations Research, 50, 462-476.

[11]   Hiller, R.S. and Erickson, J. (1993) Stochastic Dedication: Designing Fixed Income Portfolios Using Massively Parallel Benders Decomposition. Management Science, 39, 1422-1438.

[12]   Mulvey, J.M. and Vladimirou, R.J. (1992) Stochastic Network Programming for Financial Planning Problems. Management Science, 38, 1642-1664.

[13]   Zenios, R.A. (1991) Massively Parallel Computation for Financial Planning Under Uncertainty. In: Mersirov, J.D., Ed., Very Large Scale Computing in the 21st Century, SIAM, Philadelphia, 273-294.