Earnout deals: method of initial payment and acquirers' gain

Leonidas G. Barbopoulos, Krishna Paudyal, Sudi Sudarsanam

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Abstract

We analyze the implications of initial payment methods in earnout deals on acquirers’ gains. The results, which are robust to self-selection bias and alternative model specifications, reveal that earnout deals outperform non-earnout deals. The acquirers gain the most from earnout deals when both initial and deferred payments are in stocks. The positive wealth effect of the choice of initial payment method in earnout deals is more prominent in cross-border deals than in domestic deals. Overall, the earnout deals generate higher gains when both the initial and deferred payments help spread the risk between the shareholders of acquiring and target firms.
Original languageEnglish
Pages (from-to)792-828
Number of pages37
JournalEuropean Financial Management
Volume24
Issue number5
Early online date25 Jul 2017
DOIs
Publication statusPublished - 1 Nov 2018

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Keywords

  • earnout contracts
  • initial payment in earnout deals
  • asymmetric information
  • acquirers’ gains

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