Earnouts: A study of financial contracting in acquisition agreements

Matthew D. Cain, David J. Denis and Diane K. Denis

Journal of Accounting and Economics, 2011, vol. 51, issue 1, 151-170

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.

Keywords: Earnouts; Acquisitions; Contingent payments; Moral hazard; Valuation uncertainty; SFAS 141(R) (search for similar items in EconPapers)
JEL-codes: D86 G34 M41 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:51:y:2011:i:1:p:151-170

DOI: 10.1016/j.jacceco.2010.05.001

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