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On the Merger of Two Companies
North American Actuarial Journal
This paper examines the merger of two stock companies under the premise, due to Bruno de Finetti, that the companies pay out dividends to their shareholders in such a way so as to maximize the expectation of the discounted dividends until (possible) ruin or insolvency. The aggregate net income streams of the two companies are modeled by a bivariate Wiener process. Explicit results are presented. In particular, it is shown that if for each company the product of the valuation force of interest and the square of the coefficient of variation of its aggregate net income process is less than 6.87%, the merger of the two companies would result in a gain.
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