Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature poorly-performing companies. We also find that (i) valuations of different strategic bidders are more dispersed, (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.Keywords: mergers and acquisitions, strategic bidders, financial bidders, takeover auctions JEL Classification Numbers: D44, G32, G34 * Gorbenko is with London Business School. Malenko is with MIT Sloan School of Management. We are grateful to two anonymous referees, the anonymous Associate Editor, Jules van Binsbergen, Jonathan Cohn, Peter DeMarzo, Darrell Duffie, Campbell Harvey (the Editor), Han Hong, Dirk Jenter, Ron Kaniel, Arthur Korteweg, Ilan Kremer, John Lazarev, Nadya Malenko, Ian Martin, Gregor Matvos (WashU discussant), Michael Ostrovsky, Francisco Perez-Gonzalez, Matthew Rhodes-Kropf (WFA discussant), Ilya Strebulaev, Jessica Yang, Jeffrey Zwiebel, seminar participants at Boston University, Higher School of Economics, London Business School, London School of Economics, Norwegian School of Economics, University of Connecticut, University of Rochester, University of Utah, and participants at the 2010 Western Finance Association Meeting in Victoria and the 8th Annual Corporate Finance Conference at Washington University in St. Louis for helpful comments. 1Electronic copy available at: http://ssrn.com/abstract=1559481The market for corporate control is one of the largest corporate markets. In 2007 alone, the value of M&A transactions worldwide was a staggering $4.8 trillion. While some takeovers proceed as negotiations of a target with a single acquirer, many takeovers face competition among several bidders.1 The set of bidders is comprised of two groups: strategic and financial.Strategic bidders are usually companies in a related type of business, such as competitors, suppliers, or customers. They tend to look for targets that offer long-term operational synergies and integrate them into their own business. In contrast, financial bidders, typically private equity firms, look for undervalued targets with a potential to generate high cash flow, often after a reorganization. After the acquisition, a financial bidder treats the target as a part of its financial portfolio and sells it once exit opportunities become sufficiently appealing.Despite their recognized importance, 2 the differences between strategic and financial bidders remain largely unexplored. A common view is that strategic bidders are systematically willing to pay more than financial bidders. For example, as Mark E. Thompson and Michael J. O'Brien, practitioners in the privat...

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Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature poorly-performing companies. We also find that (i) valuations of different strategic bidders are more dispersed, (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.Keywords: mergers and acquisitions, strategic bidders, financial bidders, takeover auctions JEL Classification Numbers: D44, G32, G34 * Gorbenko is with London Business School. Malenko is with MIT Sloan School of Management. We are grateful to two anonymous referees, the anonymous Associate Editor, Jules van Binsbergen, Jonathan Cohn, Peter DeMarzo, Darrell Duffie, Campbell Harvey (the Editor), Han Hong, Dirk Jenter, Ron Kaniel, Arthur Korteweg, Ilan Kremer, John Lazarev, Nadya Malenko, Ian Martin, Gregor Matvos (WashU discussant), Michael Ostrovsky, Francisco Perez-Gonzalez, Matthew Rhodes-Kropf (WFA discussant), Ilya Strebulaev, Jessica Yang, Jeffrey Zwiebel, seminar participants at Boston University, Higher School of Economics, London Business School, London School of Economics, Norwegian School of Economics, University of Connecticut, University of Rochester, University of Utah, and participants at the 2010 Western Finance Association Meeting in Victoria and the 8th Annual Corporate Finance Conference at Washington University in St. Louis for helpful comments. 1Electronic copy available at: http://ssrn.com/abstract=1559481The market for corporate control is one of the largest corporate markets. In 2007 alone, the value of M&A transactions worldwide was a staggering $4.8 trillion. While some takeovers proceed as negotiations of a target with a single acquirer, many takeovers face competition among several bidders.1 The set of bidders is comprised of two groups: strategic and financial.Strategic bidders are usually companies in a related type of business, such as competitors, suppliers, or customers. They tend to look for targets that offer long-term operational synergies and integrate them into their own business. In contrast, financial bidders, typically private equity firms, look for undervalued targets with a potential to generate high cash flow, often after a reorganization. After the acquisition, a financial bidder treats the target as a part of its financial portfolio and sells it once exit opportunities become sufficiently appealing.Despite their recognized importance, 2 the differences between strategic and financial bidders remain largely unexplored. A common view is that strategic bidders are systematically willing to pay more than financial bidders. For example, as Mark E. Thompson and Michael J. O'Brien, practitioners in the privat...

Traditional real options models demonstrate the importance of the "option to wait" due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional "option to learn." The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows. Copyright (c) 2010 the American Finance Association.

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affectsMany decisions in organizations deal with the optimal timing of taking a certain action. Because information in organizations is dispersed, the decision maker needs to rely on the information of her better-informed subordinates who, however, may have conflicting preferences. Consider the following two examples of such settings: (i) in a typical hierarchical firm, top executives may be less informed than the product manager about the optimal timing of the launch of a new product. It would not be surprising for an empire-building product manager to be biased in favor of an earlier launch; (ii) the CEO of a multinational corporation is contemplating when to shut down a plant in a struggling economic region. While the local plant manager is better informed about the prospects of the plant, he may be biased toward a later shutdown due to personal costs of relocation.These examples share a common theme. An uninformed principal faces an optimal stopping-time problem-when to exercise a real option. An agent is better informed than the principal but is biased toward earlier or later exercise. In this paper, we study how organizations make timing decisions in such a setting. We examine the * Grenadier: Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA 94305 (e-mail: sgren@stanford.edu); Malenko: MIT Sloan School of Management, 100 Main Street, E62-619, Cambridge, MA 02142 (e-mail: amalenko@mit.edu); Malenko: Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467 (e-mail: nadya.malenko@bc.edu). We are grateful to three anonymous referees,

a b s t r a c tWe develop a theory of leveraged buyout (LBO) activity based on two elements: the ability of private equity-owned firms to borrow against their sponsors' reputation with creditors and externalities in sponsors' reputations due to competition and club formation. In equilibrium, the two sources of value creation in LBOs, operational improvements and financing, are complements. Moreover, sponsors that never add operational value cannot add value through financing either. Club deals are beneficial ex post by allowing lowreputation bidders with high valuations to borrow reputation from high-reputation bidders with low valuations, but they can destroy value by reducing bidders' investment in reputation. Unlike leverage of independent firms, driven only by firm-specific factors, buyout leverage is driven by economy-wide and sponsor-specific factors.

I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects.

Although acquisitions are a popular form of investment, the link between …rms' …nancial constraints and acquisition policies is not well understood. We develop a model in which …nancially constrained bidders approach targets, decide how much to bid and whether to bid in cash or in stock. In equilibrium, …nancial constraints do not a¤ect the identity of the winning bidder, but they lower bidders' incentives to approach the target. Auctions are initiated by bidders with low constraints or high synergies. The use of cash is positively related to synergies and the acquirer's gains from the deal and negatively to …nancial constraints. (D44, G32, G34) We are grateful to two anonymous referees;