Signaling and risk allocation in merger agreements

Macia and Moeller of TCU have posted their paper, Signaling and Risk Allocation in Merger Agreements. They argue that targets use firm specific MAC carveouts to signal their unobservable quality.  By declining to include firm specific MAC carveouts (e.g. carveouts relating to restatements or CEO retention, etc), high quality firms are able to create a separation from low quality firms that tend to include more firm specific MAC carveouts.  It's an interesting paper.  I will ignore (not really) their subtle finance dig:

[T]here are only few rigorous academic studies about MAC clauses, arguably because of a lack of readily available data. Instead, MAC clauses have been almost exclusively studied by practitioners and legal scholars.

Ahem...ok, temper in check. Here's the abstract:

Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions [bjmq: e.g. carveouts]. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.

-bjmq