Mergers may be undertaken by giving
shareholders of the target firm the right to exchange their stock for stock in
the combined firm. Such stock mergers release the negative signal that the acquiring
firm lacks cash. Informed traders seeking immediate gain may short sell
acquirer stock or buy puts and sell calls. Liquidity traders, desiring longterm
gain, may purchase stock or call options to benefit from lower stock prices, or
sell stock or buy put options to maintain liquidity. This paper constructs a
theoretical model in which option volume forms the bounds of the final stock
price for informed traders while random stock purchase or sale volume
establishes the final stock price for liquidity traders.
Cite this paper
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