The Role of Earnout Financing on the Valuation Effects of Global Diversification

29 Pages Posted: 13 Jun 2018

See all articles by Jo Danbolt

Jo Danbolt

University of Edinburgh Business School

Dimitris Alexakis

Independent

Leonidas Barbopoulos

University of Edinburgh

Date Written: February 2018

Abstract

This article examines the impact of earnout financing on the value of acquiring firms engaged in cross-border acquisitions (CBAs), using a dataset of UK, US, Canadian and Australian firms from 1992 to 2012. The results show that firms initiating international business operations via earnout-financed CBAs enhance their value more than acquirers in (a) domestic acquisitions and (b) remaining CBAs by established multinational corporations (MNCs). Our findings demonstrate the superiority of earnout financing in CBAs announced by acquirers that have no prior international business experience. The results are robust to the firms’ endogenous choice to diversify globally and to the use of earnout financing. We contend that earnouts contribute to the reduction of valuation risk faced by firms acquiring a foreign target firm for the first time. Our empirical findings contribute to the existing debate on the merit of international expansion through CBAs and the role of earnout contingent payment.

Keywords: cross-border acquisitions (CBAs), first-time CBAs (FTCBAs), multinational corporations (MNCs) and enterprises (MNEs), contingent earnouts, event study

Suggested Citation

Danbolt, Jo and Alexakis, Dimitris and Barbopoulos, Leonidas, The Role of Earnout Financing on the Valuation Effects of Global Diversification (February 2018). Journal of International Business Studies, Vol. 49, Issue 5, 2018. Available at SSRN: https://ssrn.com/abstract=3193365 or http://dx.doi.org/10.1057/s41267-017-0142-4

Jo Danbolt

University of Edinburgh Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Dimitris Alexakis

Independent

No Address Available

Leonidas Barbopoulos (Contact Author)

University of Edinburgh ( email )

University of Edinburgh Business School
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
633
PlumX Metrics