Stochastic Volatility, Takeover Threats and Defensive Payout Strategy

This paper proposes a dynamic model of the growth firm facing takeover threats stochastically. The formal analysis here focuses on the defensive payout strategy of value-maximizing management under the circumstances of random stock market valuation errors, and the bidders\´ perceived synergistic gains. By borrowing the concept of "hazard rate" from reliability theory, The model sheds light on takeover activities and the observed defensive payout phenomenon in the financial markets. It also yields novel testable implications concerning the impact of anti-takeover costs on the target firm\´s value over time.