Earnout deals: method of initial payment and acquirers' gain

Leonidas G. Barbopoulos, Krishna Paudyal, Sudi Sudarsanam

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.
LanguageEnglish
Number of pages37
JournalEuropean Financial Management
Early online date25 Jul 2017
DOIs
Publication statusE-pub ahead of print - 25 Jul 2017

Fingerprint

Payment
Payment methods
Shareholders
Self-selection bias
Cross-border
Model specification
Wealth effect
Alternative models

Keywords

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

Cite this

@article{f1223c2912394a14a94372f9851f3d15,
title = "Earnout deals: method of initial payment and acquirers' gain",
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.",
keywords = "earnout contracts, initial payment in earnout deals, asymmetric information, acquirers’ gains",
author = "Barbopoulos, {Leonidas G.} and Krishna Paudyal and Sudi Sudarsanam",
year = "2017",
month = "7",
day = "25",
doi = "10.1111/eufm.12135",
language = "English",
journal = "European Financial Management",
issn = "1354-7798",

}

Earnout deals : method of initial payment and acquirers' gain. / Barbopoulos, Leonidas G.; Paudyal, Krishna; Sudarsanam, Sudi.

In: European Financial Management, 25.07.2017.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Earnout deals

T2 - European Financial Management

AU - Barbopoulos, Leonidas G.

AU - Paudyal, Krishna

AU - Sudarsanam, Sudi

PY - 2017/7/25

Y1 - 2017/7/25

N2 - 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.

AB - 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.

KW - earnout contracts

KW - initial payment in earnout deals

KW - asymmetric information

KW - acquirers’ gains

U2 - 10.1111/eufm.12135

DO - 10.1111/eufm.12135

M3 - Article

JO - European Financial Management

JF - European Financial Management

SN - 1354-7798

ER -