The Right Frame of Mind for M&A: The Post-Merger Impact of Deal Frames on Target Management Behavior

Abstract

Although M&A has been studied extensively, the impact of deal frames has not. Framing is particularly important in acquisitions with earnout clauses, performance-based payment. In these deals, compensation can be framed as total potential value (upfront and earnout payment) or as guaranteed compensation (upfront payment). This choice leads to the perception of the earnout as either a loss (total compensation frame) or a gain (guaranteed compensation frame). Prospect theory suggests these different views result in risk-seeking versus risk-averse behavior. Since different merger attributes favor one or the other, I examine when to use the total or guaranteed compensation deals frames.

Keywords: M&A, Prospect Theory, Framing, Capability