Working Paper: NBER ID: w11082
Authors: Bart M. Lambrecht; Stewart C. Myers
Abstract: We present a real-options model of takeovers and disinvestment in declining industries. As product demand declines, a first-best closure level is reached, where overall value is maximized by shutting down the .rm and releasing its capital to investors. Absent takeovers, managers of unlevered firms always abandon the firm's business too late. We model the managers' payout policy absent takeovers and consider the effects of golden parachutes and leverage on managers' shut-down decisions. We analyze the effects of takeovers of under-leveraged firms. Takeovers by raiders enforce first-best closure. Hostile takeovers by other firms occur either at the first-best closure point or too early. We also consider management buyouts and mergers of equals and show that in both cases closure happens inefficiently late.
Keywords: takeovers; disinvestment; real options; managerial incentives
JEL Codes: G34; C72; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| threat of takeovers (G34) | Managers' decisions regarding disinvestment (G11) |
| absence of takeover threats (G34) | delayed disinvestment decisions (G31) |
| delayed disinvestment decisions (G31) | inefficiencies in closure (D61) |
| Golden parachutes (J33) | alignment of managers' interests with investors (G34) |
| Golden parachutes (J33) | inefficiencies in closure (D61) |
| financial leverage (G32) | abandonment and efficiency (D61) |
| higher debt levels (H63) | sooner abandonment of the firm (G33) |
| higher debt levels (H63) | alignment of managers' actions with first-best closure point (D61) |