Termination Fees in Mergers and Acquisitions: Protecting Investors or Managers?

Authors

  • Paul André,

    1. The first author is from HEC Montréal & Management School and Economics, University of Edinburgh. The second author is from Suliman S. Olayan School of Business, American University of Beirut. The third author is from John Molson School of Business, Concordia University, Montréal, Canada.
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  • Samer Khalil,

    1. The first author is from HEC Montréal & Management School and Economics, University of Edinburgh. The second author is from Suliman S. Olayan School of Business, American University of Beirut. The third author is from John Molson School of Business, Concordia University, Montréal, Canada.
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  • Michel Magnan

    Corresponding author
    1. The first author is from HEC Montréal & Management School and Economics, University of Edinburgh. The second author is from Suliman S. Olayan School of Business, American University of Beirut. The third author is from John Molson School of Business, Concordia University, Montréal, Canada.
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  • They thank Peter Pope (editor) and an anonymous referee for suggestions on improving the paper. The authors also acknowledge the financial support of the Lawrence Bloomberg Chair in Accountancy and of the Social Sciences and Humanities Research Council of Canada. They thank participants at the 2006 JBFA Capital Markets Conference in Thessaloniki, at the 4th International Corporate Governance Conference in Montreal 2005, at the CAAA Conference 2005 and seminar participants and colleagues at HEC Montreal, Concordia University, University of Edinburgh, Université de Paris XII and ESSEC Business School.

* Address for correspondence: Paul André, School of Management and Economics, University of Edinburgh, EH8 9JY, UK. e-mail: paul.andre@ed.ac.uk

Abstract

Abstract:  Institutional investors closely monitor termination fees in mergers and acquisitions (M&A). We argue that their magnitude reflects either agency problems or efficiency considerations. Focusing on M&A involving Canadian targets between 1997 and 2004, we assess the determinants and market impact of termination fees. Our findings show that the Thomson's SDC Platinum™Worldwide Mergers&Acquisitions Database underestimates their extent. Results suggest that termination fees are essentially an efficient mechanism as they are relatively higher in M&A with high merger costs, a cash component and expected operating synergies. Stock market returns surrounding the deal announcement do not differ across levels of relative termination fees.

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