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- Title
Termination fees and bilaterally efficient merger contracts.
- Authors
Farfaras, Georgios N.; Morgan, Peter B.
- Abstract
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.
- Subjects
DISCHARGE of contracts; ADMINISTRATIVE fees; CONTRACTS; RISK aversion; FORECASTING
- Publication
Canadian Journal of Administrative Sciences (John Wiley & Sons, Inc.), 2020, Vol 37, Issue 3, p366
- ISSN
0825-0383
- Publication type
Article
- DOI
10.1002/cjas.1556