Earnout Deals: Method of Initial Payment and Acquirers’ Gains

37 Pages Posted: 16 Nov 2018

See all articles by Leonidas G. Barbopoulos

Leonidas G. Barbopoulos

University of Edinburgh

Krishna Paudyal

University of Strathclyde

Puliyur Sudarsanam

Cranfield University - School of Management

Date Written: November 2018

Abstract

We analyse the implications of initial payment methods in earnout deals on acquirers’ gains. The results, which are robust to self‐selection bias and alternative model specifications, reveal that earnout deals outperform non‐earnout deals. The acquirers gain the most from earnout deals when both initial and deferred payments are in stocks. The positive wealth effect of the choice of initial payment method in earnout deals is more prominent in cross‐border deals than in domestic deals. Overall, the earnout deals generate higher gains when both the initial and deferred payments help spread the risk between the shareholders of acquiring and target firms.

Keywords: acquirers’ gains, asymmetric information, earnout contracts, initial payment in earnout deals

Suggested Citation

Barbopoulos, Leonidas G. and Paudyal, Krishna and Sudarsanam, Puliyur Sudi, Earnout Deals: Method of Initial Payment and Acquirers’ Gains (November 2018). European Financial Management, Vol. 24, Issue 5, pp. 792-828, 2018, Available at SSRN: https://ssrn.com/abstract=3285362 or http://dx.doi.org/10.1111/eufm.12135

Leonidas G. Barbopoulos (Contact Author)

University of Edinburgh ( email )

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

Krishna Paudyal

University of Strathclyde ( email )

Curran Building
100 Cathedral Street
Glasgow, G4 0LN
United Kingdom

Puliyur Sudi Sudarsanam

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

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