How Much is Too Much? Large Termination Fees and Target Distress

57 Pages Posted: 19 Aug 2014 Last revised: 2 Feb 2016

See all articles by Jordan Neyland

Jordan Neyland

Antonin Scalia Law School - George Mason University

Chander Shekhar

University of Melbourne; Financial Research Network (FIRN)

Date Written: January 30, 2016


We provide evidence that large termination fees mitigate contracting problems in acquisitions of targets with high information asymmetry. Large fees are more common if targets face financial constraints or distress. Deals with large termination fees are more likely to attract a competing bid, consistent with large fees allowing acquirers to recover bidding costs when facing a high risk of bid failure. We correct for the endogenous selection of large termination fees and present evidence that managers negotiate large fees in exchange for higher premiums. This contrasts prior evidence that suggests large fees result from managerial self-interest and harm target shareholders.

Keywords: mergers and acquisitions, termination fees, corporate distress, financial constraints, corporate investment

JEL Classification: G30, G34, G38

Suggested Citation

Neyland, Jordan and Shekhar, Chander, How Much is Too Much? Large Termination Fees and Target Distress (January 30, 2016). 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: or

Jordan Neyland (Contact Author)

Antonin Scalia Law School - George Mason University ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

Chander Shekhar

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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