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Signaling and risk allocation in merger agreements
Antonio J. Macias* Thomas Moeller**
Abstract Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.
Keywords: Mergers, acquisitions, signaling, material adverse change clauses and exclusions JEL classification: D86, G14, G32, G34 This draft: April 2013
* Texas Christian University, TCU Box 298530, Fort Worth, TX 76129. E-mail: a.macias@tcu.edu, phone: 817.257.5962 ** Texas Christian University, TCU Box 298530, Fort Worth, TX 76129. E-mail: t.moeller@tcu.edu, phone: 817.760.0050
Signaling and risk allocation in merger agreements
Abstract Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are
Antonio J. Macias* Thomas Moeller**
Abstract Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.
Keywords: Mergers, acquisitions, signaling, material adverse change clauses and exclusions JEL classification: D86, G14, G32, G34 This draft: April 2013
* Texas Christian University, TCU Box 298530, Fort Worth, TX 76129. E-mail: a.macias@tcu.edu, phone: 817.257.5962 ** Texas Christian University, TCU Box 298530, Fort Worth, TX 76129. E-mail: t.moeller@tcu.edu, phone: 817.760.0050
Signaling and risk allocation in merger agreements
Abstract Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are
References: 32 Boone, A., Mulherin, J., 2008 33 Davidoff, S., 2011 34 Hilbe, J.M., 2009 35 Roberts, M., Sufi, A., 2009