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Earnout deals: Method of initial payment and acquirers’ gains
Author(s) -
Barbopoulos Leonidas G.,
Paudyal Krishna,
Sudarsanam Sudi
Publication year - 2018
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12135
Subject(s) - payment , shareholder , business , selection (genetic algorithm) , monetary economics , actuarial science , economics , microeconomics , finance , computer science , corporate governance , artificial intelligence
We analyse the implications of initial payment methods in earnout deals on acquirers’ gains. The results, which are robust to self‐selection bias and alternative model specifications, reveal that earnout deals outperform non‐earnout deals. The acquirers gain the most from earnout deals when both initial and deferred payments are in stocks. The positive wealth effect of the choice of initial payment method in earnout deals is more prominent in cross‐border deals than in domestic deals. Overall, the earnout deals generate higher gains when both the initial and deferred payments help spread the risk between the shareholders of acquiring and target firms.