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

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 [TM] "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. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.