Earnouts: The Effects of Adverse Selection on Acquisition Techniques
Posted: 22 Jun 1998
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: Suggested Citation