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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.

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.

Suggested Citation

  • Cain, Matthew D. & Denis, David J. & Denis, Diane K., 2011. "Earnouts: A study of financial contracting in acquisition agreements," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 151-170.
    • Handle: RePEc:eee:jaecon:v:51:y:2011:i:1:p:151-170
    DOI: 10.1016/j.jacceco.2010.05.001
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    More about this item

    Keywords

    Earnouts; Acquisitions; Contingent payments; Moral hazard; Valuation uncertainty; SFAS 141(R);
    All these keywords.

    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; Personnel Economics - - Accounting - - - Accounting

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