Technological-induced information asymmetry, M&As and earnouts: stock market evidence from Germany

E. Lukas and C. Heimann

Applied Financial Economics, 2014, vol. 24, issue 7, 481-493

Abstract: To date, a few empirical studies exist that investigate the use of earnout contracts in mergers and acquisitions (M&As). However, two limitations can be attested. First, the studies predominantly investigate earnouts in Anglo-American economies and it is questionable whether we can generalize on these findings for other economies. Second, while earnouts have become an increasingly popular way of coping with information asymmetries and reducing the risk of overpayment in takeovers, less is known about what really drives the design of such contracts. To answer these questions, we conduct an event study that examines abnormal returns for different M&A contracts for a cross-industry sample of German acquirers. The novel aspect of this article is that we explicitly present a theoretical model to discuss the effect of technological-induced information asymmetries on the design of earnout contracts. While we find support for the fact that capital markets favour the use of earnouts when uncertainty and the buyer's ability to reduce technological-induced information asymmetry is high, a too-long earnout period specified in the contract appears to be detrimental.

Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/10.1080/09603107.2014.887189 (text/html)
Access to full text is restricted to subscribers.

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:taf:apfiec:v:24:y:2014:i:7:p:481-493

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603107.2014.887189

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().