On the Use of Implied Volatilities in the
Prediction of Successful Corporate Takeovers
Giovanni Barone-Adesi
Keith C. Brown
W. V. Harlow
Advances in Futures and
Options Research 7, 1994, pp. 147-165
This paper develops and tests the notion that
post-announcement prices from stock and option markets can be used to infer
both the probability of success and timing of an attempted takeover. Using a sample of 65 cash tender offers from
January 1980 to July 1989, we demonstrate that the pattern of implied stock
volatilities generated from target firm options expiring around the takeover
resolution date is strongly consistent with the hypothesis that prices
anticipate the transaction’s eventual outcome. We conclude that traders in the market for
takeover candidates behave in a rational manner, although with
less-than-perfect foresight.
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