Religion and Mergers and Acquisitions Contracting: The Case of Earnout Agreements

69 Pages Posted: 30 Jun 2016 Last revised: 30 Nov 2016

See all articles by Ahmed Elnahas

Ahmed Elnahas

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Ghada Ismail

University of Texas Rio Grande Valley

Date Written: November 29, 2016

Abstract

As currently practiced, earnout agreements in mergers and acquisitions lead to significant agency problems and also violate Islamic law. First, using regression and difference-in-difference techniques, we show that target managers significantly increase earnings by cutting discretionary expenses during earnout periods. Also, comparing matched samples, acquisitions with earnout clauses are followed by significantly lower long-term abnormal returns. Second, earnout agreements involve high uncertainty, ignorance, and possibly harmful consequences, all of which are prohibited in Islamic law. We propose alternatives to earnout agreements as currently structured that address both the agency and Islamic law issues.

Keywords: Mergers and Acquisitions, Earnout agreements, Sharia compliant finance, Earnings management, Agency cost

JEL Classification: G14, G15, G34, N25, N35

Suggested Citation

Elnahas, Ahmed and Hassan, M. Kabir and Ismail, Ghada, Religion and Mergers and Acquisitions Contracting: The Case of Earnout Agreements (November 29, 2016). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2800794 or http://dx.doi.org/10.2139/ssrn.2800794

Ahmed Elnahas (Contact Author)

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Ghada Ismail

University of Texas Rio Grande Valley ( email )

TX
United States

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