Extending Yagil exchange ratio determination model to the case of stochastic dividends

Abstract: This article extends, in a stochastic environment, the Yagil (1987) model which establishes, in a deterministic dividend discount model, a range for the exchange ratio in a stock-for-stock merger agreement. Here, we generalize Yagil's work letting both pre- and post-merger dividends grow randomly over time. If Yagil focuses only on changes in stock prices before and after the merger, our stochastic environment allows to keep in account both shares' expected values and variance, letting us to identify a more complex bargaining region whose shape depends on mean and standard deviation of the dividends' growth rate.