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
, 241-246. doi: 10.4236/tel.2014.43033
 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.
 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. http://dx.doi.org/10.1111/0022-1082.194060
 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.
 Mitchell, M., Pulvino, T. and Stafford, E. (2004) Price Pressure around Mergers. Journal of Finance, 59, 31-63. http://dx.doi.org/10.1111/j.1540-6261.2004.00626.x
 Elton, E.J. and Gruber, M.J. (1997). Modern Portfolio Theory, 1950 to Date. Journal of Banking and Finance, 21, 1743-1759. http://dx.doi.org/10.1016/S0378-4266(97)00048-4
 Markowitz, H. (1952) The Utility of Wealth. Journal of Political Economy, 60, 151-158. http://dx.doi.org/10.1086/257177
 Sharpe, W.F. (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19, 425-442.
 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. http://dx.doi.org/10.2307/1924119
 Merton, R.C. (1972) An Analytic Derivation of the Efficient Portfolio Frontier. Journal of Financial and Quantitative Analysis, 7, 1851-1872. http://dx.doi.org/10.2307/2329621
 Puelz, A.V. (2000) A Stochastic Convergence Model for Portfolio Selection. Operations Research, 50, 462-476. http://dx.doi.org/10.1287/opre.50.3.462.7738
 Hiller, R.S. and Erickson, J. (1993) Stochastic Dedication: Designing Fixed Income Portfolios Using Massively Parallel Benders Decomposition. Management Science, 39, 1422-1438. http://dx.doi.org/10.1287/mnsc.39.11.1422
 Mulvey, J.M. and Vladimirou, R.J. (1992) Stochastic Network Programming for Financial Planning Problems. Management Science, 38, 1642-1664. http://dx.doi.org/10.1287/mnsc.38.11.1642
 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.