Earnouts: The Effects of Adverse Selection and Agency Costs on Acquisition Techniques

Posted: 25 Apr 2001

See all articles by Srikant Datar

Srikant Datar

Harvard University - Accounting & Control Unit

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Mark A. Wolfson

Stanford Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

We examine the effects of adverse selection and agency costs on the structure of the consideration offered in an acquisition. Specifically, we investigate factors affecting the benefits arising from use of earnouts. We find that when targets have greater private information, consideration is more likely to be used in an acquisition if the target is a smaller, private company in a different industry than the acquirer. In addition, earnouts are more likely to be used when fewer acquisitions take place within an industry and when targets are service companies or companies with more unrecorded assets. Finally, we compare the use of earnouts with the use of stock and find that financing considerations are a more important factor in the use of stock.

Keywords: mergers and acquisitions, adverse selection, agency costs

JEL Classification: G34, G32, D82

Suggested Citation

Datar, Srikant and Frankel, Richard M. and Wolfson, Mark A., Earnouts: The Effects of Adverse Selection and Agency Costs on Acquisition Techniques. The Journal of Law, Economics, and Organization, Vol. 17, pp. 201-238, 2001. Available at SSRN: https://ssrn.com/abstract=251702

Srikant Datar

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6543 (Phone)
617-496-7363 (Fax)

Richard M. Frankel (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Mark A. Wolfson

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650) 723-0311 (Phone)
(650) 723-4010 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,979
PlumX Metrics