Do Earnouts Create the Right Incentives?: Earnings Management Around Earnout-Based Acquisitions

António Pedro Coelho () and Gilberto Loureiro ()
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António Pedro Coelho: NIPE/Centre for Research in Economics and Management, University of Minho, Portugal
Gilberto Loureiro: NIPE/Centre for Research in Economics and Management, University of Minho, Portugal

No 09/2023, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: We investigate whether acquiring firms with earnout agreements engage in earnings management during the earnout period. Using a sample of completed deals between 1998 and 2017, we find that acquirers manage their earnings downwards during the earnout period to avoid or reduce the earnout payment to the target. We also show that lower earnout payments are associated with greater earnings manipulation. Moreover, only earnout deals with a first payment in cash are associated with income decreasing earnings management through real activities. Our findings also indicate that acquirers are more likely to engage more in real earnings management than accrual-based earnings management during the earnout period.

Keywords: Earnouts; Mergers and Acquisitions; Earnings Management; Contingent Payments. (search for similar items in EconPapers)
JEL-codes: G30 G34 (search for similar items in EconPapers)
Date: 2023
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