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Item Open Access Essays on Using Options to Elicit Market Beliefs about Mergers(2011) Borochin, Paul AlexanderThe first essay of my dissertation introduces a new method for eliciting market beliefs about the expected outcomes of a merger negotiation after announcement. During a merger negotiation, the market prices of the firms involved
reflect beliefs about their values both in the merged and
standalone states, as well as the likelihood of either outcome.
These beliefs determine stock price reactions to news of a possible
merger, but those prices alone do not contain sufficient information
to identify the latent beliefs that they reflect. I develop a new
method which, by using additional data in the form of option prices,
is able to identify these beliefs. This method allows for a clear
decomposition of a negotiating firm's expected value change into two
parts: the value of the transaction to the firm, and new information
about its standalone value. Previous research into estimating
merger synergies has struggled to obtain an appropriate alternative
against which to measure the realized outcome. The market's beliefs
about state-contingent firm values give an estimate of both. Through
a direct comparison of the estimates of a firm's value in both the
merged and standalone states, I obtain a strong, practical measure
of the expected value-creating potential of a merger before its
consummation.
The second essay applies the state-contingent payoff estimation method developed previously to addressing questions about the size effect in mergers. A growing body of evidence indicates that large acquisitions destroy value. However, we do not yet know why. Several theories have been advanced, but their effects are difficult to observe in isolation. It has thus been impossible to tell whether negative post-announcement acquirer returns are caused by market expectations of value-destroying acquisitions or revealed bad news about standalone value. This paper resolves this issue by decomposing expectations about merger outcomes into expected value change from completing the acquisition and revision of beliefs about standalone firm value. The data show that deal size is correlated with value destruction, while acquirer size is correlated with release of unfavorable information. Deal size correlates with value destruction, acquirer size with bad news about the firm. Furthermore, the results suggest that overpayment is a prerequisite for large acquisitions. These findings reduce the set of possible theoretical explanations for the size effect.
Item Open Access Tailoring renewable portfolio standards to achieve disparate economic and environmental goals(2008-12-05T21:40:16Z) Martin, GarrettWithin the United States, Renewable Portfolio Standard (RPS) programs have become a popular public policy initiative for states to enact in order to encourage the use of renewable resources for meeting state energy demand. As more states have adopted RPS programs, the design of these programs have grown more varied and complex as states seek to increase the benefits and decrease the costs of RPS programs by tailoring program design to suit the interests and characteristics of a state. The purpose of this Masters Project is to create a primer for policymakers, interested in designing new, or amending existing, RPS programs, to better understand the policy design options available when developing an RPS program, the potential impacts of structuring an RPS program in a particular manner, and the current best practices and national trends in designing RPS programs. My report uses best practice RPS design principles, created by Wiser et al. in 2003, to evaluate the positive and negative impacts RPS component options have on each principle. The use of an energy-based compliance requirement, unbundled renewable energy certificates (RECs), REC banking, true-up periods, and clearly defined financial penalties for non-compliance are necessary components for the optimal performance of any state RPS program. The goals emphasized by different RPS programs and state-specific characteristics dictate the additional RPS components needed to complete the optimal RPS design for a state. Of the RPS design options analyzed, most have positive impacts on some best practice principles while having negative impacts on others. As a result, it is important for policymakers to clearly define the relative importance of different policy goals that an RPS program aims to achieve in order to select the appropriate RPS component options.