Earnouts: A Study of Financial Contracting in Acquisition Agreements

52 Pages Posted: 2 May 2006 Last revised: 16 May 2012

Matthew D. Cain

U.S. Securities and Exchange Commission

David J. Denis

University of Pittsburgh

Diane K. Denis

University of Pittsburgh - Katz School of Business

Date Written: May 1, 2010

Abstract

We empirically examine earnout contracts, which provide for contingent payments in acquisition agreements. Our analysis reveals considerable heterogeneity in the potential size of the earnout, the performance measure on which the contingent payment is based, the period over which performance is measured, the form of payment for the earnout, and the overall sensitivity of earnout payment to target performance. Our tests of the determinants of contract terms yield support for the view that earnouts are structured to minimize the costs of valuation uncertainty and moral hazard in acquisition negotiations.

Keywords: Earnouts, contingent payments, acquisitions

JEL Classification: G34

Suggested Citation

Cain, Matthew D. and Denis, David J. and Denis, Diane K., Earnouts: A Study of Financial Contracting in Acquisition Agreements (May 1, 2010). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=899094

Matthew D. Cain

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States

David J. Denis (Contact Author)

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Diane K. Denis

University of Pittsburgh - Katz School of Business ( email )

368B Mervis Hall
Pittsburgh, PA 15260
United States
412-624-0296 (Phone)

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