Earnout deals: Method of initial payment and acquirers’ gains

Leonidas G. Barbopoulos · Krishna Paudyal · Sudi Sudarsanam

26 citations0/0 files storedEuropean Financial Management

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Corporate Finance and Governance Financial Markets and Investment Strategies Private Equity and Venture Capital

Abstract

Abstract We analyse 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.

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References

1980Measuring security price performance 2004Firm size and the gains from acquisitions 2006Information Uncertainty and Stock Returns 2002What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions 1998Glamour, value and the post-acquisition performance of acquiring firms 1987A Theory for the Choice of Exchange Medium in Mergers and Acquisitions 2005The Choice of Payment Method in European Mergers and Acquisitions 2004Global diversification and bidder gains: A comparison between cross-border and domestic acquisitions

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