Target signaling with material adverse change clauses in merger agreements

Material Adverse Change (MAC) clauses play key roles in essentially all merger negotiations. Fewer exclusions in MAC clauses imply broader abandonment options for acquirers. We study the motivation for different scopes of acquirers' abandonment options. In our comprehensive hand-collected sample, broader firm-specific abandonment options are associated with higher target announcement returns and higher combined acquirer and target announcement gains, lower probabilities of MAC occurrences, and lower conditional completion rates when MACs occur. They are also more prevalent in higher-quality firms with larger information asymmetries. Overall, the results indicate that targets' credibly signaling their higher values or greater synergies is one motivation for broader abandonment options for acquirers.