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Do Earnouts Create the Right Incentives?: Earnings Management Around Earnout-Based Acquisitions

Author

Listed:
  • António Pedro Coelho

    (NIPE/Center for Research in Economics and Management, University of Minho, Portugal)

  • Gilberto Loureiro

    (NIPE/Center for Research in Economics and Management, University of Minho, Portugal)

Abstract

We investigate whether acquiring firms with earnout agreements engage in earnings management during the earnout period. Using a sample of completed deals between 1998 and 2017, we find that acquirers manage their earnings downwards during the earnout period to avoid or reduce the earnout payment to the target. We also show that lower earnout payments are associated with greater earnings manipulation. Moreover, only earnout deals with a first payment in cash are associated with income decreasing earnings management through real activities. Our findings also indicate that acquirers are more likely to engage more in real earnings management than accrual-based earnings management during the earnout period.

Suggested Citation

  • António Pedro Coelho & Gilberto Loureiro, 2023. "Do Earnouts Create the Right Incentives?: Earnings Management Around Earnout-Based Acquisitions," NIPE Working Papers 09/2023, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:09/2023
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    File URL: https://repositorium.sdum.uminho.pt/handle/1822/86749
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    More about this item

    Keywords

    Earnouts; Mergers and Acquisitions; Earnings Management; Contingent Payments.;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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