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