A Theoretical Model of Directional Volume on Acquirer Stock in Cash Mergers

Mark W.  Zikiye; Rebecca  Abraham; Charles  Harrington

doi:10.4236/tel.2014.43033

Mark W. Zikiye, Rebecca Abraham^*, Charles Harrington

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.

Keywords: Option Volüme, Informed Trading, Cash Mergers, Signaling, Price Bounds

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.

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