Fix the Price or Price the Fix? Resolving the Sequencing Puzzle in Corporate Acquisitions

Significant corporate transactions (such as financing and acquisition agreements) are typically negotiated in stages, wherein core pricing terms are fixed early while most non-price provisions are relegated to subsequent bargaining. This ordering stands in stark (and curious) contrast with canonical theories of contract design, which overwhelmingly counsel that non-price terms should be set first, saving price negotiations for last so as to fine tune the parties' net payoffs. This longstanding disjunction between theory and practice has become a celebrated puzzle for transactional design. To reconcile this disjunction we develop an innovative framework that embeds a term search game within a discrete bartering model. In spite of (and partially because of) its discreteness, our search/bartering framework delivers a robust and tractable set of intuitions about when fixing price prior to other terms incentivizes efficient search by strategic parties. Our analysis is also amenable to making counterfactual comparisons of regimes where price is (and is not) set first, generating in the process several empirically testable implications. We illustrate our main predictions empirically through a machine-learning analysis of thousands of M&A transactions executed over two decades.