Interaction of Dividend Policy and Merger Dynamics

This paper explores the interaction between dividend policy and mergers and acquisitions (M&A) in a dynamic setting. It examines the decisions faced by two firms regarding their dividend payout policy in the presence of a potential merger between them, under the risk of liquidation. The payout strategy (barrier or band) will depend on the level merger costs. One key finding of the paper shows that, unlike previous literature on merger cooperative games, firms' bargaining power becomes endogenous in leading to merger agreement.