Non-Competition Covenants in Acquisition Deals
14 Pages Posted: 17 May 2018
Date Written: March 1, 2016
We study the changes in the consumers’ and producers’ surplus associated with acquisition deals where there is a non-competition covenant that forbids the seller from re-entering the market over a given time period. We find that these acquisition deals can lead to significant negative (positive) changes in the producers’ (consumers’) surplus, which decrease significantly with the time period of the covenant. We also show that the effect of the time period of the covenant on the welfare change can be positive or negative. It depends largely on the market conditions, such as the profit uncertainty and growth rate.
Keywords: Non-Competition Covenants, Acquisitions, Real Options
JEL Classification: G34, D81
Suggested Citation: Suggested Citation