Earnouts: A study of financial contracting in acquisition agreements
AbstractWe 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 InfoArticle provided by Elsevier in its journal Journal of Accounting and Economics.
Volume (Year): 51 (2011)
Issue (Month): 1 ()
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Web page: http://www.elsevier.com/locate/jae
Earnouts; Acquisitions; Contingent payments; Moral hazard; Valuation uncertainty; SFAS 141(R);
Find related papers by JEL classification:
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
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- 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.
- 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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