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Earnouts in Mergers: Agreeing to Disagree and Agreeing to Stay

Listed author(s):
  • Kohers, Ninon
  • Ang, James
Registered author(s):

    We examine a large sample of mergers involving earnout payments made by bidders to target shareholders. Our findings suggest that earnouts serve two not mutually exclusive functions: as risk reduction mechanisms against misvaluation of high asymmetric information targets, and as retention bonuses for target human capital in mergers with feasible contract implementation. Around the merger announcement, bidder shareholders show significant positive responses, which are not reversed over the subsequent 3 years. In the postmerger period, the frequency of earnout payment and the percentage of target managers staying beyond the earnout period are high, supporting the use of earnouts as retention bonuses. Copyright 2000 by University of Chicago Press.

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    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 73 (2000)
    Issue (Month): 3 (July)
    Pages: 445-476

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    Handle: RePEc:ucp:jnlbus:v:73:y:2000:i:3:p:445-76
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