Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Corporate Acquisitions

56 Pages Posted: 31 May 2012

Date Written: January 31, 2012

Abstract

This Article seeks to answer the question whether earnouts really serve to respond to adverse selection, as commonly believed, or if alternatively, do they better address problems created by symmetric uncertainty. To answer this question I conduct difference of means tests for fair value estimates of earnouts at the time of acquisition and during the post-closing period. To the extent sellers rely on earnouts during the pre-contractual period to signal unobservable information about their own quality to an acquirer then post-closing fair value estimates should increase as acquirers confirm seller pre-signing statements. In fact, I do not find significant differences in the fair value disclosures at the time of acquisition and during the post-closing period, which suggests that parties rely on earnouts primarily to resolve the problem of uncertainty rather than adverse selection.

Keywords: information asymmetries, adverse selection, moral hazard, contract

Suggested Citation

Quinn, Brian JM, Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Corporate Acquisitions (January 31, 2012). Boston College Law School Legal Studies Research Paper No. 251, Available at SSRN: https://ssrn.com/abstract=1958617 or http://dx.doi.org/10.2139/ssrn.1958617

Brian JM Quinn (Contact Author)

BC Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States

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