The Use of Escrow Contracts in Acquisition Agreements

Sanjai Bhagat, Sandy Klasa and Lubomir P. Litov
Additional contact information
Sanjai Bhagat: University of CO
Sandy Klasa: University of AZ
Lubomir P. Litov: University of AZ

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: Many private stand-alone firm and subsidiary acquisition deals make use of escrow contracts, whereby a fraction of the total sale proceeds is placed in an escrow account. These contracts give the bidder the opportunity to lay claim on these funds subsequent to the acquisition if the seller fails to meet specific terms of the acquisition agreement or it is found that negative information about the target was hidden from the bidder. We hypothesize that escrow contracts are an efficient contracting mechanism that helps buyers and sellers to manage acquisition-related transaction risk and mitigate information asymmetry problems. Supporting our hypothesis, we show using hand-collected data that the likelihood an escrow contract is used in a private stand-alone firm or subsidiary acquisition is higher when buyer and seller transaction risk or information asymmetry about the value of the target is larger. Further, we document that escrow contracts enable sellers to obtain a higher sale price and that the use of these contracts positively impacts the extent to which a private firm or subsidiary acquisition results in value creation for the bidder.

Date: 2014-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://fic.wharton.upenn.edu/fic/papers/13/13-19.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fic.wharton.upenn.edu/fic/papers/13/13-19.pdf [301 Moved Permanently]--> https://wifpr.wharton.upenn.edu/fic/papers/13/13-19.pdf)

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:ecl:upafin:13-19

Access Statistics for this paper

More papers in Working Papers from University of Pennsylvania, Wharton School, Weiss Center Contact information at EDIRC.
Bibliographic data for series maintained by ().