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 |
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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 | |
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