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Termination fees and bilaterally efficient merger contracts
Author(s) -
Farfaras Georgios N.,
Morgan Peter B.
Publication year - 2020
Publication title -
canadian journal of administrative sciences / revue canadienne des sciences de l'administration
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 48
eISSN - 1936-4490
pISSN - 0825-0383
DOI - 10.1002/cjas.1556
Subject(s) - consummation , microeconomics , business , risk aversion (psychology) , economics , monetary economics , actuarial science , financial economics , expected utility hypothesis , philosophy , theology
We present a simple model of exchange in which mutual gains from trade motivate the use of termination fees in merger contracts. The inclusion of a termination fee permits bilaterally efficient merger contracts that make merger consummation more likely and result in higher merger payoffs for both the bidder and the target compared to contracts without termination fees. Introducing risk aversion for either the bidder or the target has negligible effects upon the preferred contracts, revealing that termination fees are not primarily a form of bidder insurance, although they do increase the probability that a merger is consummated. The model provides a rich collection of predictions, all of which are consistent with the empirical regularities reported to date.