Most mergers and acquisitions involve at least four parties with competing interests — acquiring firm shareholders, acquiring firm management, target firm shareholders, and target firm management. We consider the choice between hostile and friendly takeovers in this context and offer an explanation for the prevalence of friendly mergers between large acquirers and small targets. Negotiated merg...

Mergers redraw the boundaries of the firm. In this paper, we relate incomplete contracts to empirical regularities in the market for mergers and acquisitions. We begin by empirically challenging conventional wisdom about mergers and acquisitions: high M/B acquirers typically do not purchase low M/B targets. Instead, mergers typically pair together firms with similar M/B ratios. To show why this...