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On Mergers, Divestments, and Options: A Note

Published online by Cambridge University Press:  06 April 2009

Oded H. Sarig
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Abstract

In this note, a loss shared by the security holders of merging firms is pointed out: separate corporate entities provide double protection against future negative cash flows that are partof any production process (e.g., when customer or employee liabilities exceed future income), independent of whether or not debt is used in the corporate capital structure. A merger involvesa relinquishment of this double protection in return for a less valuable single protection: limited liability in the merged corporation against combined negative cash flows.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 3 , September 1985 , pp. 385 - 389
Copyright
Copyright © School of Business Administration, University of Washington 1985

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