The real effects of earnout contracts in M&As

Leonidas G Barbopoulos; Jo Danbolt

doi:10.1111/jfir.12256

The real effects of earnout contracts in M&As

Research output: Contribution to journal › Article › peer-review

Abstract

Earnouts address merger valuation risk by deferring payment of a large part of deal consideration and making it contingent on targets’ future performance. We find acquirers of unlisted targets using earnouts gain more (less) than those making full up-front payments in cash (stock). Larger and older acquirers benefit more from earnout-based deals, as do foreign acquirers and acquirers advised by top-tier or boutique advisors. We address identification through the PSM method and a quasi-natural experiment. Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value. Deferred payments are larger after the SFAS141(R) reform.

Original language	English
Journal	Journal of Financial Research
DOIs	https://doi.org/10.1111/jfir.12256
Publication status	Accepted/In press - 26 Apr 2021

Keywords

mergers and acquisitions
earnouts
information asymmetry
financial advisors
risk-adjusted returns
SFAS141(R) reform

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10.1111/jfir.12256

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title = "The real effects of earnout contracts in M&As",

abstract = "Earnouts address merger valuation risk by deferring payment of a large part of deal consideration and making it contingent on targets{\textquoteright} future performance. We find acquirers of unlisted targets using earnouts gain more (less) than those making full up-front payments in cash (stock). Larger and older acquirers benefit more from earnout-based deals, as do foreign acquirers and acquirers advised by top-tier or boutique advisors. We address identification through the PSM method and a quasi-natural experiment. Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value. Deferred payments are larger after the SFAS141(R) reform.",

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doi = "10.1111/jfir.12256",

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AU - Barbopoulos, Leonidas G

AU - Danbolt, Jo

PY - 2021/4/26

Y1 - 2021/4/26

N2 - Earnouts address merger valuation risk by deferring payment of a large part of deal consideration and making it contingent on targets’ future performance. We find acquirers of unlisted targets using earnouts gain more (less) than those making full up-front payments in cash (stock). Larger and older acquirers benefit more from earnout-based deals, as do foreign acquirers and acquirers advised by top-tier or boutique advisors. We address identification through the PSM method and a quasi-natural experiment. Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value. Deferred payments are larger after the SFAS141(R) reform.

AB - Earnouts address merger valuation risk by deferring payment of a large part of deal consideration and making it contingent on targets’ future performance. We find acquirers of unlisted targets using earnouts gain more (less) than those making full up-front payments in cash (stock). Larger and older acquirers benefit more from earnout-based deals, as do foreign acquirers and acquirers advised by top-tier or boutique advisors. We address identification through the PSM method and a quasi-natural experiment. Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value. Deferred payments are larger after the SFAS141(R) reform.

KW - mergers and acquisitions

KW - earnouts

KW - information asymmetry

KW - financial advisors

KW - risk-adjusted returns

KW - SFAS141(R) reform

UR - https://onlinelibrary.wiley.com/journal/14756803

U2 - 10.1111/jfir.12256

DO - 10.1111/jfir.12256

M3 - Article

JO - Journal of Financial Research

JF - Journal of Financial Research

SN - 0270-2592

ER -

The real effects of earnout contracts in M&As

Abstract

Keywords

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Fingerprint Dive into the research topics of 'The real effects of earnout contracts in M&As'. Together they form a unique fingerprint.

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