The role of earnout financing on the valuation effects of global diversification

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Abstract

This article examines the impact of earnout financing on the value of acquiring firms engaged in cross-border acquisitions (CBAs), using a dataset of UK, US,Canadian and Australian firms from 1992 to 2012. The results show that firms initiating international business operations via earnout-financed CBAs enhance their value more than acquirers in (a) domestic acquisitions and (b) remaining CBAs by established multinational corporations (MNCs). Our findings demonstrate the superiority of earnout financing in CBAs announced by acquirers that have no prior international business experience. The results are robust to the firms’ endogenous choice to diversify globally and to the use of earnout financing. We contend that earnouts contribute to the reduction of valuation risk faced by firms acquiring a foreign target firm for the first time.Our empirical findings contribute to the existing debate on the merit of international expansion through CBAs and the role of earnout contingent payment.
Original languageEnglish
Pages (from-to)523-551
JournalJournal of International Business Studies
Volume49
Issue number5
Early online date17 Feb 2018
DOIs
Publication statusPublished - Jul 2018

Keywords

  • Cross-Border Acquisitions (CBAs)
  • First-Time CBAs (FTCBAs)
  • Multinational Corporations (MNCs) and Enterprises (MNEs)
  • contingent earnouts
  • event study

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