DescriptionThis dissertation studies the impact of merger clauses. Merger clauses allocate the risks between the target and the bidder, share information among different parties in the deal and manage the negotiation process and disputes.
In the first essay, I look at reverse termination fees (henceforth, referred to as RTFs). RTFs are required payments by bidders when they “walk away” from a merger or acquisition, and vary significantly in size and design. I find inefficient RTFs correlate with lower bidder returns, even in a subsample where disclosure of RTF terms lags deal announcements by more than two days. I also find inclusion of certain RTFs in consolidating industries reveals private information to the market, resulting in negative abnormal returns. Finally, I find a negative significant relationship between the probability of deal completion and inefficient and negative signal RTFs, consistent with the fact that deals with inefficiently designed RTFs signal the bidder’s lower commitment to the current deal and deals with negative signal RTFs are adopted in consolidating industries where both deal competition and antitrust issues are higher than in other deal settings.
In the second essay, I construct merger clauses indices based on legal scholars’ ex-ante prediction and examine the relationship between announcement returns and different types of merger clauses. I find that bidder protective clauses correlate with higher bidder returns while target protective clauses and pro-competition clauses correlate with higher target returns. I also find that bidder and target protective indices have larger impacts on announcement abnormal returns for “bad” deals than for “good” deals. Finally, I find that the inclusion of more bidder protective clauses leads to lower deal completion rates while the inclusion of more target protective clauses and pro-competition clauses has no impact on deal completion rates. These results are consistent with the expert lawyer/efficient contracting view of Cain, Macias, and Davidoff Solomon (2014), and Coates (2016), and against merger contracts as boilerplate agreements.