Abstract:
Institutional investors closely monitor termination fees in mergers and acquisitions (MandA). We argue that their magnitude reflects either agency problems or efficiency considerations. Focusing on MandA 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 and Acquisitions Database underestimates their extent. Results suggest that termination fees are essentially an efficient mechanism as they are relatively higher in MandA 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. © 2007 Blackwell Publishing Ltd.