Earnouts: A study of financial contracting in acquisition agreements |
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| Authors: | Matthew D. Cain David J. Denis Diane K. Denis |
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| Affiliation: | 1. Said Business School, University of Oxford, Park End Street, Oxford OX1 1HP, UK;2. Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK;1. Mays Business School, Texas A&M University, College Station, TX 77843, United States;2. Henry B. Tippie College of Business, University of Iowa, Iowa City, IA 52242, United States;3. Peter T. Paul College of Business and Economics, University of New Hampshire, Durham, NH 03824, United States;1. Sheffield University Management School, University of Sheffield, Conduit Road, Sheffield S10 1FL, United Kingdom;2. Department of Economics, University of Birmingham, Birmingham B15 2TT, United Kingdom;3. Durham University Business School, Durham University, Mill Hill Lane, Durham DH1 3LB, United Kingdom |
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| 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. |
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