ABSTRACT
Merger agreements are carefully crafted to balance the target’s desire for certainty of closing versus the bidder’s desire to maintain flexibility in the event of unexpected changes. Taking a holistic view of merger agreements, we construct a deal tightness index (DTI) which measures how tightly the agreement binds the bidder to complete the transaction. We do this by examining three key contractual provisions identified by legal scholars as crucial in limiting the bidder’s flexibility: the specific performance provision, material adverse effect (MAE) exclusions, and bidder termination provisions. Deals with higher DTI are more likely to be completed, have a shorter time to completion, are less likely to see offer price reductions, and have lower arbitrage spreads, all of which are consistent with the idea that deal tightness provides more closing certainty for the target. DTI is negatively related to the offer premium and target announcement return, which suggests that bidders negotiate advantageous financial terms in exchange for a tighter agreement. Bidders also experience higher short-and long-term announcement returns in deals with high DTI. Examining the interactions of the constituents of DTI, we show that a strong specific performance provision often subsumes the effect of MAE exclusions. Overall, our study highlights how key contractual provisions interact to shape offer terms and merger dynamics.
Lee, Sangwon and Yerramilli, Vijay, Specific Performance, Deal Tightness, and Merger Dynamics (December 28, 2025).
Leave a Reply