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Earnout financing in the financial services industry

Author

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  • Barbopoulos, Leonidas G.
  • Molyneux, Phil
  • Wilson, John O.S.

Abstract

This paper explores the effects of earnout contracts used in US financial services M&A. We use propensity score matching (PSM) to address selection bias issues with regard to the endogeneity of the decision of financial institutions to use such contracts. We find that the use of earnout contracts leads to significantly higher acquirer abnormal returns (short- and long-run) compared to counterpart acquisitions (control deals) which do not use such contracts. The larger the size of the deferred (earnout) payment, as a fraction of the total transaction value, the higher the acquirers' gains in the short- and long-run. Both acquirer short- and long-run gains increase when the management team of the target institution is retained in the post-acquisition period.

Suggested Citation

  • Barbopoulos, Leonidas G. & Molyneux, Phil & Wilson, John O.S., 2016. "Earnout financing in the financial services industry," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 119-132.
    • Handle: RePEc:eee:finana:v:47:y:2016:i:c:p:119-132
    DOI: 10.1016/j.irfa.2016.07.001
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    More about this item

    Keywords

    Earnouts; Acquisitions of financial institutions; Propensity score matching; Rosenbaum-bounds;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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