Earnouts: A Study of Financial Contracting in Acquisition Agreements
We empirically examine earnout contracts, which provide for contingent payments in acquisition agreements. Our analysis reveals considerable heterogeneity in the terms of earnout contracts, i.e. the potential size of the earnout, the performance measure on which the contingent payment is based, the period over which performance is measured, the frequency with which performance is measured, and the form of payment for the earnout. Consistent with the costly contracting hypothesis, we find that the terms of earnout contracts are associated with measures of target valuation uncertainty, target growth opportunities, and the degree of post-acquisition integration between target and acquirer. We conclude that earnouts are structured to minimize the costs of adverse selection and moral hazard in acquisition negotiations.
|Date of creation:||Sep 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.krannert.purdue.edu/programs/phd
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stewart C. Myers, 2000. "Outside Equity," Journal of Finance, American Finance Association, vol. 55(3), pages 1005-1037, 06.
- Datar, Srikant & Frankel, Richard & Wolfson, Mark, 2001. "Earnouts: The Effects of Adverse Selection and Agency Costs on Acquisition Techniques," Journal of Law, Economics and Organization, Oxford University Press, vol. 17(1), pages 201-38, April.
- Matthew Rhodes-Kropf & S. Viswanathan, 2004. "Market Valuation and Merger Waves," Journal of Finance, American Finance Association, vol. 59(6), pages 2685-2718, December.
- Mara Faccio & Ronald W. Masulis, 2005. "The Choice of Payment Method in European Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(3), pages 1345-1388, 06.
- Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
- Shleifer, Andrei & Vishny, Robert W., 2003.
"Stock market driven acquisitions,"
Journal of Financial Economics,
Elsevier, vol. 70(3), pages 295-311, December.
- Smith, Clifford Jr. & Watts, Ross L., 1992.
"The investment opportunity set and corporate financing, dividend, and compensation policies,"
Journal of Financial Economics,
Elsevier, vol. 32(3), pages 263-292, December.
- Smith, C.W. & Watts, R.L., 1992. "The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies," Papers 92-02, Rochester, Business - Financial Research and Policy Studies.
- Hansen, Robert S., 2001. "Do investment banks compete in IPOs?: the advent of the "7% plus contract"," Journal of Financial Economics, Elsevier, vol. 59(3), pages 313-346, March.
- Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
- Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
- Kohers, Ninon & Ang, James, 2000. "Earnouts in Mergers: Agreeing to Disagree and Agreeing to Stay," The Journal of Business, University of Chicago Press, vol. 73(3), pages 445-76, July.
- Hansen, Robert G, 1987. "A Theory for the Choice of Exchange Medium in Mergers and Acquisitions," The Journal of Business, University of Chicago Press, vol. 60(1), pages 75-95, January.
- Steven N. Kaplan & Per Str�mberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 281-315.
- Micah S. Officer, 2004. "Collars and Renegotiation in Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 59(6), pages 2719-2743, December.
- Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
When requesting a correction, please mention this item's handle: RePEc:pur:prukra:1196. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Krannert PHD)
If references are entirely missing, you can add them using this form.