Psychological pricing in mergers and acquisitions using real options signalling games

Merger and acquisition (M&A) pricing can be quite complex as traditional finance models that are used for such pricing does not include psychological pricing biases that exist in such transactions. Though, the use of game theory and option pricing has shown promise in analyzing M&A transactions. In this paper, we develop a two-person M&A model incorporating real options signaling games, which uses game theory and option pricing to find a Nash equilibrium for such transactions. The two-person M&A model is an incomplete information game and signaling in the game assists the type of the opponent, which helps a player improve their play-off in the game.