Earnouts: The Effects of Adverse Selection on Acquisition Techniques

Posted: 22 Jun 1998

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

Abstract

We examine the effects of moral hazard and adverse selection on the structure of the consideration offered in an acquisition. Specifically, we investigate factors affecting the occurrence of earnouts, finding that when targets have greater private information, consideration is more likely to be based on the future performance of the target. We find an earnout is more likely to be used in an acquisition if the target is a smaller, private company in a different industry and country than the acquirer. Earnouts are also more likely to be used when fewer acquisitions take place within an industry.

JEL Classification: G34, D82

Suggested Citation

Datar, Srikant and Frankel, Richard M. and Wolfson, Mark A., Earnouts: The Effects of Adverse Selection on Acquisition Techniques. Available at SSRN: https://ssrn.com/abstract=98408

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)

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