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http://ssrn.com/abstract=899094
 
 

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Earnouts: A Study of Financial Contracting in Acquisition Agreements


Matthew D. Cain


U.S. Securities and Exchange Commission

David J. Denis


University of Pittsburgh

Diane K. Denis


University of Pittsburgh - Katz School of Business

May 1, 2010

Journal of Accounting & Economics (JAE), Forthcoming

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.

Number of Pages in PDF File: 52

Keywords: Earnouts, contingent payments, acquisitions

JEL Classification: G34

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Date posted: May 2, 2006 ; Last revised: May 16, 2012

Suggested Citation

Cain, Matthew D. and Denis, David J. and Denis, Diane K., Earnouts: A Study of Financial Contracting in Acquisition Agreements (May 1, 2010). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=899094

Contact Information

Matthew D. Cain
U.S. Securities and Exchange Commission ( email )
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States
David J. Denis (Contact Author)
University of Pittsburgh ( email )
Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
Diane K. Denis
University of Pittsburgh - Katz School of Business ( email )
368B Mervis Hall
Pittsburgh, PA 15260
United States
412-624-0296 (Phone)
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