IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v45y2018i3-4p437-481.html
   My bibliography  Save this article

Enforcement quality and the use of earnouts in M&A transactions: International evidence

Author

Listed:
  • Luca Viarengo
  • Stefano Gatti
  • Annalisa Prencipe

Abstract

Earnouts are contractual agreements in merger and acquisition (M&A) deals that link part of the acquisition price to the future performance of the target company. These contracts seem to be a panacea for adverse selection and valuation risk issues in M&As. However, earnouts are not very popular. A likely reason for their limited diffusion is that earnouts have their origin in disagreement and in disagreement they may end: given the complexity of the verification of their outcome and the risk of moral hazard by the bidder, litigation at the time of their payout is far from uncommon. Absent effective legal protection for earnout holders, the potential benefits of these contracts could turn out to be empty promises, thus limiting incentives to include them in acquisition deals. Using an international sample of 37,228 deals completed between 2000 and 2015, we show that the inclusion of these contracts in M&As is significantly related to a country's enforcement quality. Furthermore, we show that a similar relation holds for the proportion of earnout payments with respect to total consideration. Our results hold after controlling for other determinants of earnout suggested by prior literature and for other institutional factors that could affect the use of earnouts.

Suggested Citation

  • Luca Viarengo & Stefano Gatti & Annalisa Prencipe, 2018. "Enforcement quality and the use of earnouts in M&A transactions: International evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 45(3-4), pages 437-481, March.
    • Handle: RePEc:bla:jbfnac:v:45:y:2018:i:3-4:p:437-481
    DOI: 10.1111/jbfa.12314
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jbfa.12314
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jbfa.12314?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Monaco, Eleonora & Ibikunle, Gbenga & Palumbo, Riccardo & Zhang, Zeyu, 2022. "The liquidity and trading activity effects of acquisition payment methods: Evidence from the announcements of private firms' acquisitions," International Review of Financial Analysis, Elsevier, vol. 82(C).
    2. Cheng, Zijian & Liu, Zhangxin (Frank) & Wang, Isabel Zhe & Zhao, Xingju, 2024. "Reverse merger audit fee premium: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 94(C).
    3. Dahlen, Niklas & Lahmann, Alexander & Schreiter, Maximilian, 2024. "Panacea for M&A dealmaking? Investor perceptions of earnouts," Finance Research Letters, Elsevier, vol. 60(C).
    4. Jongmoo Jay Choi & Omer F. Genc & Ming Ju, 2020. "Is an M&A self‐dealing? Evidence on international and domestic acquisitions and CEO compensation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1290-1315, October.
    5. Leonidas G. Barbopoulos & Jo Danbolt, 2021. "The real effects of earnout contracts in M&As," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 607-639, September.
    6. Gada, Viswa Prasad & Goyal, Lakshmi & Popli, Manish, 2021. "Earnouts in M&A deal structuring: The impact of CEO prevention focus," Journal of International Management, Elsevier, vol. 27(1).
    7. Alberto Quagli & Corrado Lagazio & Paola Ramassa, 2021. "From enforcement to financial reporting controls (FRCs): a country-level composite indicator," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(2), pages 397-427, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:45:y:2018:i:3-4:p:437-481. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.