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Does geographic dispersion increase the stock price crash risk after M%A with earnouts? Evidence from China

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  • Jingyi Guan
  • Yunhui Wen
  • Eping Liu

Abstract

We investigate how geographic dispersion affects the stock price crash risk following mergers and acquisitions (M%A) transactions with earnouts using a sample of transactions from China's A-shares from 2010 to 2021. Empirical results show that geographic dispersion between the acquiring and target firms intensifies the stock price crash risk after earnouts. This occurs because geographic dispersion diminishes the levels of post-earnout performance achievements and R%D investment. Further discussion reveals that in cases of geographic dispersion, cross-industry M%As, and when target companies perform well and are of significant size, there is a greater propensity to sign earnout agreements, which leads to higher M%A premiums. Additionally, the negative impact of geographic dispersion on the stock price crash risk after earnouts is also affected by transaction characteristics. This study enriches the literature on M%A risks and provides valuable insights for mitigating risks in the capital markets.

Suggested Citation

  • Jingyi Guan & Yunhui Wen & Eping Liu, 2024. "Does geographic dispersion increase the stock price crash risk after M%A with earnouts? Evidence from China," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 14(3), pages 299-323.
    • Handle: RePEc:ids:injbaf:v:14:y:2024:i:3:p:299-323
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