The earnout structure matters: Takeover premia and acquirer gains in earnout financed M&As

Leonidas Barbopoulos, Samer Adra

    Research output: Contribution to journalArticlepeer-review

    13 Citations (Scopus)
    14 Downloads (Pure)

    Abstract

    In this article, based on both parametric and non-parametric methods, we provide a robust solution to the longstanding issue on how earnouts in corporate takeovers are structured and how their structure influences the takeover premia and the abnormal returns earned by acquirers. First, we quantify the effect of the terms of earnout contract (relative size and length) on the takeover premia. Second, we demonstrate how adverse selection considerations lead themerging firms to set the initial payment in an earnout financed deal at a level that is lower than, or equal to, the full deal payment in a comparable non-earnout financed deal. Lastly, we show that
    while acquirers in non-earnout financed deals experience negative abnormal returns from an increase in the takeover premia, this effect is neutralised in earnout financed deals.
    Original languageEnglish
    Pages (from-to)283-294
    Number of pages12
    JournalInternational Review of Financial Analysis
    Volume45
    Early online date9 Apr 2016
    DOIs
    Publication statusPublished - May 2016

    Keywords

    • Earnout financing
    • Information asymmetry
    • Takeover premia
    • Abnormal returns
    • Propensity Score Matching
    • Rosenbaum-bounds

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