Religion and mergers and acquisitions contracting: The case of earnout agreements

Ahmed M. Elnahas, M. Kabir Hassan and Ghada M. Ismail

Journal of Corporate Finance, 2017, vol. 42, issue C, 221-246

Abstract: This paper contributes to the growing literature on the effect of religion on corporate decision making. We posit that contingent payment in mergers and acquisitions not only violates Islamic law but also results in several agency issues by creating an incentive for managers to participate in long-term value-destroying behavior during earnout periods. Our empirical results, using regression as well as difference-in-difference estimation, show that target managers significantly manage earnings upward by cutting discretionary expenses during earnout periods. As compared to a sample of matched non-earnout M&A, acquisitions with earnout clauses are followed by significantly lower long-term abnormal returns. Our arguments and results have significant economic and legal consequences on cross-border M&A and could be used to facilitate worldwide economic integration.

Keywords: Mergers and acquisitions; Earnout agreements; Islamic finance; Earnings management; Agency cost (search for similar items in EconPapers)
JEL-codes: G15 G34 M48 N30 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0929119916303145
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:42:y:2017:i:c:p:221-246

DOI: 10.1016/j.jcorpfin.2016.11.012

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().