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Earnouts: A study of financial contracting in acquisition agreements

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  • Cain, Matthew D.
  • Denis, David J.
  • Denis, Diane K.
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    Abstract

    We empirically examine earnout contracts, which provide for contingent payments in acquisition agreements. Our analysis reveals considerable heterogeneity in the potential size of the earnout, the performance measure on which the contingent payment is based, the period over which performance is measured, the form of payment for the earnout, and the overall sensitivity of earnout payment to target performance. Our tests of the determinants of contract terms yield support for the view that earnouts are structured to minimize the costs of valuation uncertainty and moral hazard in acquisition negotiations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 51 (2011)
    Issue (Month): 1-2 (February)
    Pages: 151-170

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    Handle: RePEc:eee:jaecon:v:51:y:2011:i:1-2:p:151-170

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Earnouts Acquisitions Contingent payments Moral hazard Valuation uncertainty SFAS 141(R);

    References

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    Cited by:
    1. Kohli, Reena & Mann, Bikram Jit Singh, 2013. "Analyzing the likelihood and the impact of earnout offers on acquiring company wealth gains in India," Emerging Markets Review, Elsevier, vol. 16(C), pages 203-222.
    2. Barbopoulos, Leonidas & Sudarsanam, Sudi, 2012. "Determinants of earnout as acquisition payment currency and bidder’s value gains," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 678-694.

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