The Use of Escrow Contracts in Acquisition Agreements

49 Pages Posted: 29 May 2013 Last revised: 7 Sep 2016

See all articles by Sanjai Bhagat

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Sandy Klasa

University of Arizona - Department of Finance

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: September 5, 2016

Abstract

A large fraction of acquisition deals for private firm and subsidiary targets include an escrow contract giving the bidder the opportunity to lay claim on escrow account funds if subsequent to the acquisition the seller fails to meet specific acquisition agreement terms. The likelihood of using an escrow contract is higher when buyer or seller transaction risk is larger. Also, the use of escrow contracts (i) helps to reduce bidders’ due diligence costs, (ii) enables sellers to obtain a higher sale price, and (iii) raises the extent to which an acquisition leads to an increase in bidder firm shareholder value.

Keywords: mergers and acquisitions, escrow contracts, financial contracting

JEL Classification: G34

Suggested Citation

Bhagat, Sanjai and Klasa, Sandy and Litov, Lubomir P., The Use of Escrow Contracts in Acquisition Agreements (September 5, 2016). Available at SSRN: https://ssrn.com/abstract=2271394 or http://dx.doi.org/10.2139/ssrn.2271394

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Sandy Klasa

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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