Financing acquisitions with earnouts

Thomas W. Bates, Jordan B. Neyland and Yolanda Yulong Wang

Journal of Accounting and Economics, 2018, vol. 66, issue 2, 374-395

Abstract: We present evidence that earnout agreements in acquisition contracts provide a substantial source of financing for acquirers. Acquirers in transactions with earnouts are significantly more likely to be financially constrained, face tighter credit market conditions, and use less debt and equity to fund acquisitions. Financially constrained acquirers also book lower fair values for the contingent claim. Earnout use is more likely in transactions that involve liquid sellers, and earnout bids garner higher transaction valuation multiples. Overall, the evidence suggests that earnouts are an economically material and increasingly common source of acquisition financing for acquirers with limited access to external capital.

Keywords: Earnouts; Financial constraints; Contingent liabilities; Mergers and acquisitions; Corporate finance (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:66:y:2018:i:2:p:374-395

DOI: 10.1016/j.jacceco.2018.08.002

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