How much is reasonable? The size of termination fees in mergers and acquisitions

Jin Q. Jeon, James A. Ligon

Research output: Contribution to journalArticlepeer-review

33 Scopus citations

Abstract

We investigate termination fee size in mergers. Although the deal premium does not significantly affect fee size, smaller targets and targets with lower institutional ownership offer larger fees. Low or moderate fees do not eliminate post-announcement competing bids, while large fees do. Fee size is generally positively correlated with deal completion. However, large fees are negatively correlated with the consummation of high-premium deals. Fee size is generally unrelated to announcement-date cumulative abnormal returns. However, returns are significantly lower for deals including fees larger than 5%. Overall, the study provides evidence that low- or moderate-size fees serve as efficient contractual devices, while large fees are less beneficial to shareholders and therefore tend to suggest agency conflicts.

Original languageEnglish
Pages (from-to)959-981
Number of pages23
JournalJournal of Corporate Finance
Volume17
Issue number4
DOIs
StatePublished - Sep 2011

Keywords

  • Deal premium
  • Mergers and acquisitions
  • Termination fees

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