TITLE:
A Theoretical Model of Directional Volume on Acquirer Stock in Cash Mergers
AUTHORS:
Mark W. Zikiye, Rebecca Abraham, Charles Harrington
KEYWORDS:
Option Volüme, Informed Trading, Cash Mergers, Signaling, Price Bounds
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.3,
April
17,
2014
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.