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Target signaling with material adverse change clauses in merger agreements

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  • Macias, Antonio J.
  • Moeller, Thomas

Abstract

Material Adverse Change (MAC) clauses play key roles in essentially all merger negotiations. Fewer exclusions in MAC clauses imply broader abandonment options for acquirers. We study the motivation for different scopes of acquirers’ abandonment options. In our comprehensive hand-collected sample, broader firm-specific abandonment options are associated with higher target announcement returns and higher combined acquirer and target announcement gains, lower probabilities of MAC occurrences, and lower conditional completion rates when MACs occur. They are also more prevalent in higher-quality firms with larger information asymmetries. Overall, the results indicate that targets’ credibly signaling their higher values or greater synergies is one motivation for broader abandonment options for acquirers.

Suggested Citation

  • Macias, Antonio J. & Moeller, Thomas, 2016. "Target signaling with material adverse change clauses in merger agreements," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 69-92.
    • Handle: RePEc:eee:empfin:v:39:y:2016:i:pa:p:69-92
    DOI: 10.1016/j.jempfin.2016.09.002
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    Cited by:

    1. Malmendier, Ulrike M. & Karsten, Christel & Sautner, Zacharias, 2020. "Lawyer Expertise and Contract Design – Evidence from M&A Negotiations," CEPR Discussion Papers 14936, C.E.P.R. Discussion Papers.
    2. Yiannis Anagnostopoulos & George Alexandrou & Hardy M. Thomas, 2024. "European banking M&As: The role of financial advisors," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1193-1231, November.
    3. Carol L. Cain & Gary M. Fleischman & Antonio J. Macias & Juan Manuel Sanchez, 2021. "Ethics, Adverse Selection, Target Method of Sale Strategies, and Akerlof’s “Lemons†Problem," Accounting and Finance Research, Sciedu Press, vol. 10(3), pages 1-1, August.

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    More about this item

    Keywords

    Mergers; Acquisitions; Signaling; Material adverse change clauses; D86; G14; G32; G34;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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