Motivations for Material Adverse Change Clauses in Merger Agreements
51 Pages Posted: 15 Jun 2016
Date Written: June 05, 2016
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 motivations 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 signal their higher values or greater synergies with broader abandonment options for acquirers.
Keywords: Mergers, Acquisitions, Signaling, Material Adverse Change Clauses
JEL Classification: D86, G14, G32, G34
Suggested Citation: Suggested Citation