Contingent Earnouts in Acquisitions of Privately-Held Targets

Ragozzino, R. and Reuer, J. Contingent Earnouts in Acquisitions of Privately-Held Targets. 2009. Journal of Management, Vol. 35: 857-879

Posted: 9 Apr 2014

See all articles by Roberto Ragozzino

Roberto Ragozzino

University of Liverpool; University of Tennessee

Jeffrey J. Reuer

Purdue University - Krannert School of Management

Date Written: April 8, 2009

Abstract

Prior research has devoted significant attention to ownership choices when firms make market-entry decisions (e.g., equity alliance versus acquisition). This article emphasizes the importance of studying firms’ contractual choices as well as the potential relationships between their contractual and ownership choices. This study of acquisitions examines the incidence and determinants of contingent earnouts, which are contracts that specify deferred variable payments to the target. The evidence indicates that the usage of such contracts increases with information asymmetries surrounding mergers and acquisitions, in particular when privately held targets are young or possess knowledge bases that are dissimilar from those of the acquirers. The article also presents evidence that firms’ contractual choices (i.e., earnouts) and ownership choices (i.e., equity alliances) can substitute for one another.

Keywords: contingent earnouts, mergers and acquisitions, strategic alliances, contracts, information economics

Suggested Citation

Ragozzino, Roberto and Reuer, Jeffrey J., Contingent Earnouts in Acquisitions of Privately-Held Targets (April 8, 2009). Ragozzino, R. and Reuer, J. Contingent Earnouts in Acquisitions of Privately-Held Targets. 2009. Journal of Management, Vol. 35: 857-879 . Available at SSRN: https://ssrn.com/abstract=2422306

Roberto Ragozzino (Contact Author)

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/roberto-ragozzino/

University of Tennessee ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

HOME PAGE: http://robertoragozzino.com

Jeffrey J. Reuer

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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