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Why Are Bidder Termination Provisions Included in Takeovers?

Published online by Cambridge University Press:  10 August 2021

Zhiyao Chen Open the ORCID record for Zhiyao Chen [Opens in a new window] ,
Hamed Mahmudi ,
Aazam Virani  and
Xiaofei Zhao
Zhiyao Chen
Affiliation:
Lingnan University Faculty of Businessnicholaschen@ln.edu.hk
Hamed Mahmudi
Affiliation:
University of Delaware Lerner College of Business and Economicshmahmudi@udel.edu
Aazam Virani*
Affiliation:
University of Arizona Eller College of Management
Xiaofei Zhao
Affiliation:
Georgetown University McDonough School of Businessxiaofei.zhao@georgetown.edu
*
avirani@arizona.edu (corresponding author)
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Abstract

We present a rationale for bidder termination provisions that considers their effect on bidders’ and targets’ joint takeover gains. The provision’s inclusion can create value by enabling termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This trade-off explains why the provision is included in only some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 7 , November 2022 , pp. 2860 - 2896
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank anonymous reviewers, Heitor Almeida, Jack Bao, Tom Bates, Alice Bonaimé, Susan Christoffersen, Erfan Danesh, Steven Davidoff Solomon, Sergei Davydenko, Lora Dimitrova, Craig Doidge, Craig Dunbar, Alexander Dyck, Louis Ederington, Matthias Fleckenstein, David Goldreich, Jarrad Harford, Raymond Kan, Tingting Liu, Paul Malatesta (the editor), Micah Officer, Rick Sias, Vahap Uysal, Wei Wang, and Jason Wei, conference participants at the 2016 Conference on Empirical Legal Studies, 2016 Journal of Law, Finance and Accounting Conference, Midwest Finance Association 2013 Meeting, and Northern Finance Association 2013 Meeting, seminar participants at the University of Oklahoma and the University of Toronto, and Daniel Levine of Paul, Weiss, Rifkind, Wharton & Garrison LLP for valuable comments and suggestions. We thank Javier Castelo, Hyuksoon Lim, Doug Severidt, Vincent Wang, and Kiana Xu for providing excellent research assistance.

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