Jacco J.J. Thijssen

Optimal and Strategic Timing of Mergers and Acquisitions Motivated By Synergies and Risk Diversification

This paper analyses a real options model of mergers and takeovers between two firms experiencing different, but correlated, uncertainty. It is assumed that mergers do not just lead to efficiency gains, but are also an act of diversification. Due to the latter assumption the region where a merger is optimal is a bounded interval and not a half-space as in most real options models. It is shown that if the roles of the bidder and the target are determined endogenously the option value of the mergers vanishes completely, implying that, in equilibrium, the mergers occur sooner than when these roles are exogenously given. It is also shown that mergers can be optimal even if synergies are negative.

Preemption in a real option game with a first mover advantage and player-specific uncertainty

In this paper a two-player real option game with a first-mover advantage is analyzed, where payoffs are driven by a player-specific stochastic state variable. It is shown that there exists an equilibrium which has qualitatively different properties from those in standard real option games driven by common stochastic shocks. The properties of the equilibrium are four-fold: (i) preemption does not necessarily occur, (ii) if preemption takes place, the rent-equalization property holds, (iii) for almost all sample paths it is clear ex-ante which player invests first, and (iv) it is possible that both players invest simultaneously, even if that is not optimal. It is argued from simulations that real option games with a common one-dimensional shock do not provide a good approximation for games with player-specific uncertainty, even if these are highly correlated.

The effect of information streams on capital budgeting decisions

In this paper a new decision rule for capital budgeting is considered. A firm has the opportunity to invest in a project of uncertain profitability. Over time, the firm receives additional information in the form of signals indicating the profitability of the project. The belief that the firm needs to have in a profitable project for investment to be optimal is calculated and analyzed. It is shown that the probability of investing in a project with low profitability is larger when the firm uses a conventional rule like the net present value rule. As a counterintuitive result it is obtained that it can be optimal to undertake the investment at a later point in time in case the expected number of signals per time unit is higher. Also an error measure is discussed that indicates the accuracy of capital budgeting rules in this stochastic environment.

Migrant Networks and the Spread of Misinformation

Diaspora networks provide information to future migrants, which affects their success in the host country. While the existing literature explains the effect of networks on the outcomes of migrants through the size of the migrant community, we show that the quality of the network is an equally important determinant. We argue that networks that are more integrated in the society of the host country can provide more accurate information to future migrants about job prospects. In a decision model with imperfect signalling, we show that migrants with access to a better network are more likely to make the right decision, that is, they migrate only if they gain. We test these predictions empirically using data on recent Mexican migrants to the United States. To instrument for the quality of networks, we exploit the settlement of immigrants who came during the Bracero program in the 1950s. The results are consistent with the model predictions, providing evidence that connections to a better integrated network lead to better outcomes after migration.

The impact of voluntary disclosure on a firm’s investment policy

In this paper we provide a model which describes how voluntary disclosure impacts on the timing of a firm’s investment decisions. A manager chooses a time to invest in a project and a time to disclose the investment return in order to maximise his monetary payoff. We assume that this payoff is linked to the level of the firm’s stock price. Prior to investing, the profitability of the project and the market reaction to the disclosure of the investment return are uncertain, but the manager receives signals at random points in time which assist in resolving some of this uncertainty. We find that a manager whose objective can only be achieved through voluntarily disclosing the return is motivated to invest at a time that would be sub-optimal for an identical manager with a profit maximising objective.

Quick or Persistent? Strategic Investment Demanding Versatility

In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which each firm has an option to switch from the present market to a new market. We construct a subgame perfect equilibrium in mixed strategies and show that both preemption and attrition can occur along typical equilibrium paths. In order to determine the attrition region a two-dimensional constrained optimal stopping problem needs to be solved, for which we characterize the non-trivial stopping boundary in the state space. We explicitly determine Markovian equilibrium stopping rates in the attrition region and show that there is always a positive probability of eventual preemption, contrasting the deterministic version of the model. A simulation-based numerical example illustrates the model and shows the relative likelihoods of investment taking place in attrition and preemption regions.

Incomplete Markets, Knightian Uncertainty, and Irreversible Investment

The problem of irreversible investment with idiosyncratic risk is studied by interpreting market incompleteness as a source of Knightian uncertainty over the appropriate discount factor. Maxmin utility over multiple priors is used to solve the irreversible investment problem. The notion of priors with kappa-ignorance are used to analyse finitely lived options. For infinitely lived options the notion of constant kappa-ignorance is introduced. For these sets of density generators the corresponding optimal stopping problem is solved for general (in-)finite horizon optimal stopping problems driven by geometric Brownian motions. It is argued that an increase in the level of ambiguity delays investment, whereas an increase in the degree of market completeness can have a non-monotonic effect.

A Theory of Non-Exclusive Real Options With First-Mover Advantages

This paper analyses the exercise decision of non-exclusive real options in a two-player setting. A general model of non-exclusive real options, allowing the underlying asset to follow any strong Markov process is developed, thus extending the existing literature, which is mainly based on one-dimensional geometric Brownian motion. For games with a first-mover advantage it is proved that an equilibrium with the rent-equalisation property exists. As an example, a duopoly where two firms can adopt a new technology, whose profitability follows a two-dimensional, correlated geometric Brownian motion is studied.

Approximate Stochastic Stability with an Application to the Survival of Walrasian Conjectures in Cournot Oligopoly

This paper presents a general framework for analysing stochastic stability in models with evolution at two levels. Under certain conditions these two levels can be disentangled and studied separately. In such cases the limit distribution at one level can be used to approximate the limit distribution of the entire dynamics. A precise upper bound of this approximation is given. The states in the support of this approximation are the approximate stochastically stable states. The approach is applied to a model of conjectural variation and imitation in Cournot oligopoly. If behavioural change takes place infrequently, the Walrasian conjecture and quantity is the unique approximate stochastically stable state.

Non-Exclusive Real Options with First-Mover Advantages

This paper analyses the exercise decision of non-exclusive real options in a two-player setting. A general model of non-exclusive real options, allowing the underlying asset to follow any strong Markov process is developed, thus extending the existing literature, which is mainly based on one-dimensional geometric Brownian motion. For games with a first-mover advantage it is proved that an equilibrium with the rent-equalization property exists. It is also shown that many more exercise scenarios are possible than in deterministic timing games. As an example, a duopoly where two firms can adopt a new technology, whose profitability follows a two-dimensional, correlated geometric Brownian motion is studied.