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The real effects of earnout contracts in M&As

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  • Leonidas G. Barbopoulos
  • Jo Danbolt

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 propensity score matching 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 SFAS 141(R) reform.

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  • Leonidas G. Barbopoulos & Jo Danbolt, 2021. "The real effects of earnout contracts in M&As," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 607-639, September.
    • Handle: RePEc:bla:jfnres:v:44:y:2021:i:3:p:607-639
    DOI: 10.1111/jfir.12256
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