Earnouts: A Study of Financial Contracting in Acquisition Agreements
52 Pages Posted: 2 May 2006 Last revised: 16 May 2012
Date Written: May 1, 2010
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.
Keywords: Earnouts, contingent payments, acquisitions
JEL Classification: G34
Suggested Citation: Suggested Citation
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