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Earnout deals: Method of initial payment and acquirers’ gains

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  • Leonidas G. Barbopoulos
  • Krishna Paudyal
  • Sudi Sudarsanam

Abstract

We analyse the implications of initial payment methods in earnout deals on acquirers’ gains. The results, which are robust to self‐selection bias and alternative model specifications, reveal that earnout deals outperform non‐earnout deals. The acquirers gain the most from earnout deals when both initial and deferred payments are in stocks. The positive wealth effect of the choice of initial payment method in earnout deals is more prominent in cross‐border deals than in domestic deals. Overall, the earnout deals generate higher gains when both the initial and deferred payments help spread the risk between the shareholders of acquiring and target firms.

Suggested Citation

  • Leonidas G. Barbopoulos & Krishna Paudyal & Sudi Sudarsanam, 2018. "Earnout deals: Method of initial payment and acquirers’ gains," European Financial Management, European Financial Management Association, vol. 24(5), pages 792-828, November.
    • Handle: RePEc:bla:eufman:v:24:y:2018:i:5:p:792-828
    DOI: 10.1111/eufm.12135
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    References listed on IDEAS

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    Cited by:

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    4. Gada, Viswa Prasad & Goyal, Lakshmi & Popli, Manish, 2021. "Earnouts in M&A deal structuring: The impact of CEO prevention focus," Journal of International Management, Elsevier, vol. 27(1).

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