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

Leonidas G Barbopoulos^*, Jo Danbolt

^*Corresponding author for this work

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
Pages (from-to)	607-639
Number of pages	33
Journal	Journal of Financial Research
Volume	44
Issue number	3
Early online date	23 Jul 2021
DOIs	https://doi.org/10.1111/jfir.12256
Publication status	Published - 6 Sept 2021

Keywords / Materials (for Non-textual outputs)

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

Access to Document

10.1111/jfir.12256Licence: Creative Commons: Attribution (CC-BY)

BarbopoulosLDanboltJ2021JFRTheRealEffectsOfEarnoutContractsFinal published version, 1.11 MBLicence: Creative Commons: Attribution (CC-BY)

Cite this

@article{e703f1e2e6074bca8ad31923e6e31492,

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.",

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

author = "Barbopoulos, {Leonidas G} and Jo Danbolt",

year = "2021",

month = sep,

day = "6",

doi = "10.1111/jfir.12256",

language = "English",

volume = "44",

pages = "607--639",

journal = "Journal of Financial Research",

issn = "0270-2592",

publisher = "Wiley-Blackwell",

number = "3",

}

TY - JOUR

T1 - The real effects of earnout contracts in M&As

AU - Barbopoulos, Leonidas G

AU - Danbolt, Jo

PY - 2021/9/6

Y1 - 2021/9/6

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

U2 - 10.1111/jfir.12256

DO - 10.1111/jfir.12256

M3 - Article

SN - 0270-2592

VL - 44

SP - 607

EP - 639

JO - Journal of Financial Research

JF - Journal of Financial Research

IS - 3

ER -

The real effects of earnout contracts in M&As

Abstract

Keywords / Materials (for Non-textual outputs)

Access to Document

Fingerprint

Cite this