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Financing acquisitions with earnouts

Author

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  • Bates, Thomas W.
  • Neyland, Jordan B.
  • Wang, Yolanda Yulong

Abstract

We present evidence that earnout agreements in acquisition contracts provide a substantial source of financing for acquirers. Acquirers in transactions with earnouts are significantly more likely to be financially constrained, face tighter credit market conditions, and use less debt and equity to fund acquisitions. Financially constrained acquirers also book lower fair values for the contingent claim. Earnout use is more likely in transactions that involve liquid sellers, and earnout bids garner higher transaction valuation multiples. Overall, the evidence suggests that earnouts are an economically material and increasingly common source of acquisition financing for acquirers with limited access to external capital.

Suggested Citation

  • Bates, Thomas W. & Neyland, Jordan B. & Wang, Yolanda Yulong, 2018. "Financing acquisitions with earnouts," Journal of Accounting and Economics, Elsevier, vol. 66(2), pages 374-395.
    • Handle: RePEc:eee:jaecon:v:66:y:2018:i:2:p:374-395
    DOI: 10.1016/j.jacceco.2018.08.002
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