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 Sep 2021

Keywords

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

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

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

Cite this

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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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AU - Danbolt, Jo

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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.

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KW - earnouts

KW - information asymmetry

KW - financial advisors

KW - risk-adjusted returns

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The real effects of earnout contracts in M&As

Abstract

Keywords

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